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 ... Capital expenditure versus revenue expenditure - characterisation of royalty/license fees - right to use versus transfer of ownership - enduring benefit - recurring payments as indicia of revenue nature - license tenure, sublicensing and restrictions on transfer of know how - recognition of income on crystallisationCapital expenditure versus revenue expenditure - characterisation of royalty/license fees - right to use versus transfer of ownership - recurring payments as indicia of revenue nature - license tenure, sublicensing and restrictions on transfer of know how - Whether annual royalty payments made to Baxter International Inc. USA are capital expenditure or revenue expenditure for the years under appeal - HELD THAT: - The Tribunal examined the licence agreement (including clauses excluding sublicensing, safeguarding licensor's rights, and permitting termination after notice) and found no clause effecting transfer of patent/trademark/know how ownership to the assessee. The payments were recurring and payable year to year for continued use. Applying established principles and precedents of the Jurisdictional High Court and Tribunals, the Tribunal held that access/right to use technical information under a license, absence of unfettered ownership or sub licensing rights, limited tenure and recurring method of payment point towards revenue character. The Tribunal noted that Jonas Woodhead was not fully apposite (wherein only part of royalty was held capital) and, following multiple decisions cited, concluded the annual royalty payments are revenue expenditure. [Paras 10, 16, 17]Royalty payments in issue are revenue expenditure; departmental appeals against disallowance are dismissed.Depreciation classification of UPS as integral to computer system - allowable rate of depreciation - Whether extra depreciation at 60% on UPS (treated as integral part of computer system) is allowable for AY 2007-08 - HELD THAT: - The CIT(A) relied on the Delhi High Court decision in CIT vs. BSES Yamuna Power Ltd. and concluded that UPS formed an integral part of the computer system and so attracted higher depreciation. The Revenue failed to cite contrary authority or distinguish the precedent. In absence of any inconsistent judicial authority, the Tribunal found no reason to interfere with the appellate authority's conclusion. [Paras 18]Deletion of disallowance of depreciation on UPS is upheld; extra depreciation at 60% allowed.Recognition of income on crystallisation - interest accrued in escrow pending arbitration - Whether interest credited to an escrow account but not legally payable pending arbitration constitutes income in earlier assessment years or is to be recognised when the arbitration award crystallised the right (AY 2007-08 issue) - HELD THAT: - The Tribunal reproduced the appellate authority's reasoning that the assessee had no legal right to withdraw the deposit or accrued interest while the arbitration was pending; the legal right - and therefore income - arose only when the arbitrator's award in favour of the assessee crystallised in the later year. Although the bank had credited interest and deducted TDS earlier, the assessee declared the whole interest in the year when the right vested and claimed credit for TDS. The Assessing Officer's addition of the earlier year interest was inconsistent with the principle of recognising income on crystallisation and would result in double taxation. Revenue did not place facts or law to dispute the CIT(A)'s finding. [Paras 9, 19]Addition of interest credited earlier is deleted; appellate authority's conclusion upheld.Appeal maintenance and non pressing of cross objection - Whether the assessee's cross objection (CO 399/Del/2010) is pressed - HELD THAT: - The assessee expressly informed the Tribunal that the cross objection was not being pressed. The Tribunal accordingly dismissed the cross objection as not pressed. [Paras 7]Cross objection dismissed as not pressed.Final Conclusion: The Tribunal, applying licence based tests and relevant precedents, held the contested royalty payments to be revenue expenditure and upheld the CIT(A)'s deletions; it also upheld allowance of higher depreciation on UPS and deletion of the interest addition. Accordingly all three departmental appeals and the assessee's cross objection are dismissed. 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.