2016 (7) TMI 1608 - AT - Income Tax

Tribunal Upholds Decisions on Royalty Payments, Depreciation, and Income Recognition; Dismisses Reassessment Challenge.

The Tribunal dismissed the Department's appeals and the assessee's cross-objection (CO), affirming the CIT(A)'s decisions. It upheld the deletion of ... Addition on account of Royalty - revenue or capital expenditure - AR supported the order of the AO and submitted that Baxter International Inc. USA was in effect an AE of the assessee and the payment of royalty was actually a payment for the purchase of trade-mark/technical know-how under the garb of royalty - HELD THAT:- As perused the License Agreement dated 27th October, 2003 specially clause 2 which specifically excludes the right of the licensee to grant sub licenses under Patent Rights, Trademark Rights and Software Copyright Rights to third parties unless so authorized by the Licensor. Clause 7 of the agreement safeguards the licensor’s right to protect the patent rights, trademark rights and software copyright rights and know-how rights. Clause 9 provides that either party can terminate either the whole or part of the agreement upon service of 30 days’ prior notice to the other party and that the initial tenure of the agreement is for ten years which is extendable for one year every year subject to the termination by notice by either of the parties. However, no where does the agreement mention that Patent/Trademark/Software copyright/know-how is being purchased by the licensee/assessee and that the assessee will have an unfettered right over the same. The ld. DR could not point out to any clause in the agreement which would suggest that there was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. [2008 (3) TMI 679 - DELHI HIGH COURT], the assessee company entered into an agreement with M/s Stanley Electric Co. Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expenditure. The Assessing Officer disallowed the claim holding that by virtue of the agreement, the assessee had derived an asset of enduring nature. On appeal, the CIT (A) allowed the assessee's claim holding that the expenditure incurred by the assessee was a recurring expenditure and not a capital expenditure. The Tribunal upheld the order of the CIT (A). On Revenue's appeal to the High Court held it to be revenue expenditure. Depreciation on UPS - Whether UPS formed integral part of the computer system as the same was being used only with computers and not otherwise and hence depreciation was rightly allowable at 60% instead of 15% as allowed by the AO - HELD THAT:- CIT (A) has relied on the judgment of the Hon’ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd. [2010 (8) TMI 58 - DELHI HIGH COURT] while deleting the disallowance. The ld. DR could not cite any other judgment where a different view has been held. Hence, we find no reason to interfere and dismiss ground no. 2 of the Department’s appeal. Accrual of income - Addition on account of interest income - HELD THAT:- The breakup of the interest pertaining to the AY 2006- 07, 2007-08, 2008-09 & 2009-10 credited by the bank in its account has been given by the appellant as noted -. Since the appellant did not have any right to claim the interest, it did not have any income accrued to it on account of interest in the Asst. Years preceding 2009-10. However, since the TDS was deducted on the interest credited by the bank, the appellant has taken credit on the same in the ITRs for the earlier Asst. Years. Since the appellant has declared the interest accrued for the entire period in the AY 2009-10 when it got the right to interest income ,the action of the AO in assessing the interest credited by the bank in the AY 2007-08 is not in order. Had the appellant not claimed TDS deducted by the bank in the respective assessment years, the TDS would have been lost. As per the appellant-for the Assessment Year 2008-09 the AO has not made any addition on this account. Therefore the addition made by the AO is deleted and the ground of appeal is allowed Issues Involved:1. Deletion of addition on account of Royalty.2. Deletion of addition on account of extra depreciation claimed on UPS.3. Deletion of addition on account of interest income.4. Assailing the initiation of reassessment proceedings.Detailed Analysis:1. Deletion of Addition on Account of Royalty:The Department challenged the deletion of additions made on account of royalty payments for AY 2004-05, 2007-08, and 2008-09. The core issue was whether the royalty payments made by the assessee to Baxter International Inc. USA were capital or revenue expenditures. The Department contended that the payments were for acquiring trademarks and technical know-how, thus capital in nature. The AO disallowed these payments, treating them as capital expenditures. However, the CIT(A) deleted the additions, holding that the payments were for the use of trademarks and technical know-how without transferring ownership rights, thus qualifying as revenue expenditures. The Tribunal upheld the CIT(A)'s decision, referencing judicial precedents which established that payments for the use of technical know-how and trademarks, without ownership transfer, are revenue expenditures. The Tribunal noted that the royalty payments were recurring and contingent on annual sales, with no clause in the agreement indicating ownership transfer.2. Deletion of Addition on Account of Extra Depreciation Claimed on UPS:The Department contested the deletion of an addition of Rs. 18,423/- for extra depreciation claimed on UPS for AY 2007-08. The CIT(A) allowed the higher depreciation rate of 60%, considering UPS as an integral part of the computer system, referencing the Delhi High Court's judgment in CIT vs. BSES Yamuna Power Ltd. The Tribunal upheld this decision, noting the Department's failure to present any contrary judgment.3. Deletion of Addition on Account of Interest Income:The Department challenged the deletion of an addition of Rs. 34,17,901/- on account of interest income for AY 2007-08. The assessee had deposited funds in an escrow account due to a dispute with Wockhardt Lifesciences Ltd., and the interest accrued was declared in AY 2009-10 after the dispute was resolved. The CIT(A) concluded that the interest income crystallized only upon the arbitrator's decision in FY 2008-09, thus correctly declared in AY 2009-10. The Tribunal upheld this finding, rejecting the AO's addition for AY 2007-08, as the interest income was not legally claimable by the assessee until the dispute resolution.4. Assailing the Initiation of Reassessment Proceedings:The assessee's CO for AY 2004-05, challenging the initiation of reassessment proceedings, was dismissed as not pressed by the assessee.Conclusion:The Tribunal dismissed all three departmental appeals and the assessee's CO, upholding the CIT(A)'s decisions on all contested issues. The Tribunal emphasized the principles distinguishing capital and revenue expenditures, particularly in the context of royalty payments for technical know-how and trademarks, and the correct assessment of income based on its crystallization.