2017 (11) TMI 1362 - AT - Income Tax

Tribunal rules royalty payment as revenue expenditure in service industry trademark case

DCIT, Circle 12 (1), New Delhi Versus G4S Facility Services (India) P. Ltd.

The Tribunal upheld the treatment of the royalty payment as revenue expenditure, following legal precedents and considering the nature of the payment for ... Treatment to royalty payment - revenue expenditure OR capital expenditure - Held that:- First Appellate Authority has rightly deleted the addition made by the A.O. because these royalty payments are paid for use of trademark licences. After going through the impugned order the Ld. CIT(A) has observed that in case of group companies (G4S Security Systems) in the A.Y. 2002-03, 2003-04 and 2005-06 has been rightly allowed by Hon’ble High Court after appreciating the legal and factual position and in case of G4S Pvt.Ltd. in the A.Y. 2008-09 and 2009-10 the Ld. CIT(A) himself has allowed the appeal of the assessee and in this regard the Ld. DR could not controvert the finding that whether against the order of Ld. CIT(A) for A.Y. 2008-09 and 2009-10 for G4S Pvt.Ltd. the appeal has been filed in upper forum or not. The Ld. CIT(A) has also observed that for the A.Y. 2008-09 and 2009-10 in the assessee’s own case on identical facts and circumstances had allowed the appeal of the assessee. But the Ld.DR could not controvert whether revenue has filed any appeal against such order. In the case of group companies the Hon’ble High Court has allowed the royalty payment as revenue expenditure in the case of assessee group companies. - Decided against the revenue. Issues Involved:1. Treatment of royalty payment as revenue expenditure instead of capital expenditure.Analysis:The appeal before the Appellate Tribunal ITAT Delhi involved the issue of whether a royalty payment of Rs. 1,28,60,000 should be treated as revenue expenditure or capital expenditure. The assessee, engaged in facility services, had claimed this payment as a revenue expenditure. The Assessing Officer, however, treated it as a capital expenditure and allowed depreciation of 25% on the amount. The First Appellate Authority, after considering submissions and case laws, allowed the appeal of the assessee. The Revenue then appealed before the Tribunal challenging this decision.The Tribunal analyzed the facts and legal position, considering various judicial pronouncements. It noted that a similar case involving a group company had been dismissed by the Delhi High Court, holding the royalty payment as revenue expenditure. The Tribunal found that the appellant company, engaged in the service industry, was paying royalty for the use of trademarks and trade names, with no enduring benefit after contract termination. The royalty was based on turnover percentage, not a lump sum, and the appellant had a non-exclusive right to use the trademarks. The Tribunal agreed that the appellant had not acquired any enduring benefit or asset, following the decisions cited by the appellant and the Delhi High Court's rulings on similar cases.The Tribunal upheld the First Appellate Authority's decision to delete the addition made by the Assessing Officer, as the royalty payments were for trademark licenses and not capital expenditure. It referenced previous cases where similar royalty payments were allowed as revenue expenditure for group companies. The Tribunal found no fault in the First Appellate Authority's decision and dismissed the Revenue's appeal, deciding the issue in favor of the assessee.In conclusion, the Tribunal upheld the treatment of the royalty payment as revenue expenditure, following legal precedents and considering the nature of the payment for trademark licenses in the service industry. The decision was based on the lack of enduring benefit and the specific terms of the agreement, leading to the dismissal of the Revenue's appeal.