Tribunal affirms royalty as revenue, grants higher depreciation for UPS & printers

The Tribunal upheld the CIT(A)'s decisions in the case, dismissing the appeals filed by the Revenue. The Tribunal affirmed that the royalty payment for using technology from a foreign company is revenue expenditure, not capital. It also confirmed that UPS and printers qualify for higher depreciation rates as integral parts of computers. Additionally, the Tribunal agreed that no expenses related to assumed exempt income should be disallowed when no such income was earned, in line with judicial precedents and consistent rulings.

---

---

Issues Involved:
1. Deletion of addition made in respect of royalty payment.
2. Excess depreciation claimed on UPS.
3. Disallowance of expenditure in relation to exempt income under Section 14A read with Rule 8D of the Income-tax Rules, 1962.

Detailed Analysis:

1. Deletion of Addition Made in Respect of Royalty Payment:
The first issue pertains to the deletion of the addition made concerning royalty payment. The assessee company paid royalty to Koito Manufacturing Company Ltd. based on an agreement from 1995, granting exclusive rights to manufacture and sell products in India using licensed technology. The Assessing Officer (AO) disallowed 25% of the royalty payment, treating it as capital expenditure providing enduring benefits. The assessee argued that this issue had already been decided in its favor in previous years by the ITAT, Chennai, which classified the royalty payment as revenue expenditure. The Tribunal reiterated that the royalty payment for using technology provided by the foreign company is revenue in nature and cannot be treated as capital expenditure. The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO, following consistent judicial precedents.

2. Excess Depreciation Claimed on UPS:
The second issue concerns the excess depreciation claimed on UPS at 60%. The AO disallowed the higher depreciation rate, categorizing UPS and printers as office equipment eligible for only 15% depreciation. However, the CIT(A) followed the decision of the Hon'ble Madras High Court in the case of M/s. Brakes India Limited, which held that UPS and printers are integral parts of computers and thus eligible for higher depreciation at 60%. The Tribunal upheld the CIT(A)'s decision, confirming that UPS and printers qualify for higher depreciation as part of computer systems.

3. Disallowance of Expenditure in Relation to Exempt Income under Section 14A read with Rule 8D:
The third issue involves the disallowance of expenses related to exempt income under Section 14A read with Rule 8D. The AO disallowed expenses by applying Rule 8D, despite the assessee not earning any exempt income during the relevant years. The CIT(A) deleted these additions, reasoning that without exempt income, there could be no disallowance of related expenses. The Tribunal supported this view, citing the Hon'ble Madras High Court's decision in M/s. Redington India Ltd. vs. ACIT, which held that in the absence of exempt income, no disallowance under Section 14A is warranted. The Tribunal upheld the CIT(A)'s decision for both assessment years, confirming that no expenses related to assumed exempt income should be disallowed when no such income was earned.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue on all grounds, affirming the CIT(A)'s decisions. The Tribunal's judgment was pronounced on 23rd November 2022 at Chennai.

---