2017 (3) TMI 1922 - AT - Income Tax

Tribunal decision: Expenditure deemed revenue, not capital.

The Tribunal allowed the appeal, determining that the expenditure of Rs. 3,41,42,848/- paid to A.C. Nielsen ORG Marg Pvt. Ltd. was revenue in nature and ... Capital expenditure - revenue expenditure - enduring benefit test - exclusive data supply agreement - warding off competition - acquisition of asset - depreciation on intangible assetCapital expenditure - revenue expenditure - enduring benefit test - exclusive data supply agreement - warding off competition - acquisition of asset - Whether the payment of Rs.3,41,42,848/- made by the assessee to AC Nielsen ORG-Marg Pvt. Ltd. under the Exclusive Data Supply Agreement is capital or revenue in nature for the relevant year and therefore deductible as business expenditure. - HELD THAT: - The Tribunal found as an undisputed factual matrix that ORG continued to possess the PMS meters and the PMS technology became obsolete while ORG supplied FMS-based data to the assessee under the Exclusive Data Supply Agreement, with ORG charging for supplied data periodically. The payments comprised (i) 2/3rd of the written down value of ORG's PMS meters (paid because those meters became redundant) and (ii) severance costs of personnel rendered redundant on account of PMS obsolescence. The Tribunal recorded that no asset was transferred to the assessee and that the payments were made as part of arranging supply of FMS data; the write off related to assets that remained with ORG and were not used by the assessee. Applying the commercial test of the nature of advantage, the Tribunal held that even if an enduring benefit resulted, the nature of the advantage was not in the capital field but constituted facilitation of the assessee's trading operations and supply of raw data at cost; accordingly the test of enduring benefit could not be applied mechanically to convert the expenditure into capital. The Tribunal distinguished precedents cited by the Revenue (Chelpark Company Ltd. and Tamil Nadu Dairy Development Corporation Ltd. ) on facts where payments were clearly to ward off competition and resulted in acquisition of an enduring right or asset, and relied on the principle in Empire Jute Co. that enduring benefit does not invariably denote capital expenditure; it also noted authorities on upfront payments giving rise to revenue treatment where the benefit is in reduced running cost (Madras Auto Service ). Given the absence of acquisition of any asset or exclusive commercial right transferrable to the assessee, and the continuing supply arrangement under which ORG supplied data periodically (and at cost), the Tribunal concluded the payments were revenue in nature and allowable as business expenditure. [Paras 8, 9, 10]Payments of Rs.2,89,82,667/- (2/3rd WDV of PMS meters) and Rs.51,60,181/- (severance costs) are revenue expenditures and allowable; the assessee's appeal is allowed.Final Conclusion: The Tribunal allowed the assessee's appeal for A.Y. 2003-04, holding that the one time payments to ORG under the Exclusive Data Supply Agreement are revenue expenditures (not capital) because no asset or capital right was acquired and the advantage, if any, was in the revenue field. Issues Involved:1. Whether the expenditure of Rs. 3,41,42,848/- paid to A.C. Nielsen ORG Marg Pvt. Ltd. should be treated as capital or revenue in nature.2. If the expenditure is considered capital in nature, whether depreciation can be allowed on the same as an intangible asset.Issue-wise Detailed Analysis:1. Treatment of Expenditure as Capital or Revenue:The primary issue in this appeal revolves around the classification of the expenditure of Rs. 3,41,42,848/- paid by the assessee to A.C. Nielsen ORG Marg Pvt. Ltd. (ORG) under an Exclusive Data Supply Agreement. The assessee argued that this expenditure was revenue in nature, while the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as capital expenditure.The assessee is engaged in providing television audience measurement services and entered into an agreement with ORG, which was also in the same business. ORG used two technologies for data collection: Frequency Matching Technology (FMS) and Picture Matching Technology (PMS). The assessee used only FMS, and the data collected using PMS by ORG became redundant. Consequently, the assessee agreed to bear 2/3rd of the Written Down Value (WDV) of the PMS meters and the severance cost of personnel engaged in PMS data collection.The AO and CIT(A) held that the payment was made to ward off competition, providing an enduring benefit to the assessee, and hence, treated it as capital expenditure. They relied on the exclusivity clause in the agreement, which prevented ORG from supplying data to other parties.The Tribunal, however, found that the payment did not result in the acquisition of any asset or enduring benefit. The PMS meters remained with ORG and were not acquired by the assessee. The payment was made as part of the arrangement for the supply of data and did not ward off competition. The Tribunal relied on the judgment of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. 124 ITR 1, which held that not every advantage of enduring nature is capital expenditure. The Tribunal concluded that the payment was revenue in nature and allowed it as a deduction.2. Depreciation on Capital Expenditure:As an alternative argument, the assessee contended that if the expenditure is considered capital in nature, depreciation should be allowed on it as an intangible asset under section 32(1)(ii) of the Income-tax Act. However, since the Tribunal decided the main issue in favor of the assessee, this alternative plea became academic and was not addressed.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the expenditure of Rs. 3,41,42,848/- paid to ORG was revenue in nature and should be allowed as a deduction. The alternative plea regarding depreciation was not considered since the main issue was decided in favor of the assessee.