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 ... Nature of expenditure - revenue or capital expenditure - expenditure on account of payment for compensation as per exclusive data supply agreement for compensating the 2/3rd cost at WDV for the PMS meters becoming obsolete and consequently holding cost of severance of personal of ORG redundant consequent to PMS technology becoming obsolete - HELD THAT:- We are of the view that it has not acquired any asset by paying the aforesaid amounts to ORG for the cost of write off of PMS as the PMS meters were rendered obsolete and as a part of the arrangement for supply of data to INTAM the payment had to be made. In fact, the PMS meters remained with ORG and not acquired by INTAM and not used by INTAM as the Picture Matching Technology became obsolete. Any payment made for writing off the PMS meters borne by INTAM was of revenue nature as no asset was acquired by it. Similarly, the compensation paid to ORG for the severance of the personnel engaged in collecting data by PMS technology was also of revenue in nature, as no asset was acquired by the assessee on payment of such amount. If the expenditure did not result in the acquisition of any asset or advantage of enduring benefit, such expenditure cannot be considered as capital in nature and the same is necessarily of revenue in nature. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would he disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is. therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. This issue of the assessee’s appeal is allowed. 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.