Commercial expediency and functional test govern royalty, advertising and depreciation disputes in transfer pricing and asset classification.

Royalty and technical fee paid to foreign associated concerns was held not to be disallowable where the payments were backed by agreements, regulatory approvals and evidence of commercial necessity, and no positive material showed diversion of profits or lack of business purpose. UPS attached to a computer was treated as an external power-support device and not an integral part of the computer system, so higher depreciation for computers was not allowable. Advertisement and sales promotion expenditure incurred in India for the assessee's own business was allowed, as incidental benefit to the foreign brand owner and a bare reference to section 92 did not justify disallowance without material showing absence of business purpose.

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Issues: (i) Whether the royalty/technical fee paid to the foreign associated concerns was disallowable as excessive or for extraneous consideration under the Income-tax Act, 1961. (ii) Whether UPS attached to the computer system was eligible for depreciation at the rate applicable to computers. (iii) Whether the disallowance of advertisement and sales promotion expenses was justified on the ground that the expenditure benefited the foreign brand owner and attracted section 92.

Issue (i): Whether the royalty/technical fee paid to the foreign associated concerns was disallowable as excessive or for extraneous consideration under the Income-tax Act, 1961.

Analysis: The payment was supported by agreements and regulatory approvals, and the record showed that the assessee had furnished substantial material to justify the commercial necessity of the technical collaboration. The Revenue did not bring positive evidence to show that the expenditure was a mere device to divert profits or that the payment lacked business purpose. Suspicion, even if strong, could not replace evidence. The disallowance made by treating a substantial part of the royalty as excessive was therefore not sustainable.

Conclusion: The issue is decided in favour of the assessee. The disallowance of royalty/technical fee was not justified.

Issue (ii): Whether UPS attached to the computer system was eligible for depreciation at the rate applicable to computers.

Analysis: UPS was found to be an external power-support device that ensured uninterrupted supply and regulated voltage, but it was not an inbuilt component of the computer itself. The computer system could function independently without it, and the higher rate of depreciation for computers was intended for equipment whose technology becomes rapidly obsolete. On the functional test, UPS was treated as plant and machinery rather than as a computer.

Conclusion: The issue is decided against the assessee. Higher depreciation on UPS was not allowable.

Issue (iii): Whether the disallowance of advertisement and sales promotion expenses was justified on the ground that the expenditure benefited the foreign brand owner and attracted section 92.

Analysis: The expenditure was incurred in India for promoting the assessee's own sales in respect of products actually dealt in by it, and the payments were made to third parties in India. The mere fact that the foreign brand owner may also have benefited incidentally did not deprive the expenditure of its character as business expenditure. No material was brought to show that the expenses were not wholly and exclusively incurred for the assessee's business or that section 92 was attracted.

Conclusion: The issue is decided in favour of the assessee. The disallowance of advertisement and sales promotion expenses was rightly deleted.

Final Conclusion: The appeal of the assessee succeeds on the principal issues relating to royalty and advertisement expenditure, while the claim for higher depreciation on UPS fails. The Revenue's challenge to the allowance of advertisement expenditure also fails, resulting in a partial relief to the assessee.

Ratio Decidendi: An expenditure is allowable when it is shown to be incurred for the assessee's business on the basis of commercial expediency and supporting material, and a disallowance cannot rest merely on suspicion or on an incidental benefit to another concern; depreciation depends on the actual functional character of the asset and not on its loose association with computer equipment.

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