2007 (4) TMI 299 - AT - Income Tax

Tribunal Partly Allows Appeal: Deletes Royalty Disallowance, Confirms Excise Duty Exclusion for Tax Deduction.

The Tribunal partly allowed the assessee's appeal, directing the deletion of the disallowance of royalty payments and confirming the exclusion of excise ... Disallowance of 2/3rd of royalty payment to non-resident companies - confirmed by the CIT(A) - Held that:- The similar issue came up for consideration before the Tribunal, 'D' Bench, New Delhi in assessee's own case for asst. yrs. 1997-98 and 1998-99 [Addl. CIT vs. Nestle India Ltd.- 2005 (1) TMI 333]. We, concurring with the above said decision of the Tribunal hold that the disallowance of royalty payments made by the AO and confirmed by the learned CIT(A) was not justified. We, therefore, direct to delete the same. Depreciation on UPS - @60% OR 15% - Whether the UPS is Plant and machinery Or an integral part of the whole computer system - HELD THAT:- UPS is a source of alternative supply of power to the computer and applying the functional test also, it is a part of power supply system and not the computer system. it is also not inbuilt in the computer as a battery in the laptop to make it an integral part of the computer system. It merely gives external aid to the computer system by ensuring the uninterrupted power supply in emergency and in regulating the flow of power. It is worthwhile to note here that the computer system can function independently without the UPS and even the UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not the integral part of the computer system like printer and scanner, which being output devices of the computer system are its integral part and, thus, are included in the definition of a computer as given in s. 2(1)(i) of the Information Technology Act, 2000. It is also pertinent to note here that a higher rate of depreciation is provided on computers mainly because the technology used in the making of computer is rapidly developing and the same becomes obsolete very fast. Applying this criteria also, the UPS cannot be treated as a part of computer since the technology which goes into making UPS is not developing so rapidly to make it obsolete in the short span. Thus, we find it difficult to accept the contention of the learned counsel for the assessee that UPS is a part of computer and is entitled to a higher depreciation rate of 60 per cent and rejecting the same, we uphold the impugned order of the learned CIT(A) confirming the disallowance made by the AO by restricting the claim of the assessee for depreciation on UPS treating the same as plant and machinery. Ground No. 2 of the assessee's appeal is accordingly dismissed. Incurred expenses on advertisement and sale promotion - sales in India - HELD THAT:- The expenditure has been incurred to promote sales in India. Therefore, these expenses were incurred wholly and exclusively for the purpose of business of the assessee. Further, payment for these expenses have been made to third parties in India who are not in anyway related the Nestle SA. Therefore, there is no justification on the part of AO to invoke the provisions of s. 92 of the Act in the matter. Therefore, we find ourselves in agreement with the view of CIT(A) that provisions of s. 92 are not applicable for the allowability of this expenditure. The expenditure incurred by the assessee company on advertisement/sales promotion of some Nestle products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the assessee, once it is established that the expenditure in question has been incurred by the assessee for the purpose of business of the assessee inasmuch as the expenditure by the assessee on advertisement/sales promotion has direct nexus with the earning of income by the assessee. It may be mentioned that an identical issue had come up for consideration in the case of Star India (P) Ltd. vs. Addl. CIT[2006 (7) TMI 668 - ITAT MUMBAI] wherein it has been held that advertisement expenses incurred on promoting viewership of TV channel by the assessee engaged in procuring programmes for those channel was expenditure incurred wholly and exclusively for the purpose of its business and it could not be disallowed on the ground that it might have also benefited the assessee's principal. Thus, we do not find any reason to interfere with the order of the CIT(A) passed in this regard. Hence, the same is upheld. In the result, the appeal filed by the assessee is partly allowed and that of the Revenue is dismissed. Issues Involved:1. Disallowance of royalty payment.2. Depreciation on UPS.3. Setting off of losses for deduction under Section 80HHC.4. Charging of interest under Section 234B.5. Exclusion of excise duty from total turnover for deduction under Section 80HHC.6. Disallowance of advertisement expenses.Issue-wise Detailed Analysis:1. Disallowance of Royalty Payment:The assessee claimed a royalty payment of Rs. 56.73 crores, out of which Rs. 37.82 crores was disallowed by the AO. The AO argued that the services for which the royalty was paid were not fully substantiated, and only 1/3rd of the payment was justified. The CIT(A) upheld the disallowance, reasoning that the royalty payments were excessive and not entirely for business purposes, citing that the company was already manufacturing the products before the agreements. The Tribunal, however, referred to its earlier decision in the assessee's own case for previous assessment years, where it was held that the royalty payments were justified and necessary for the business. The Tribunal concluded that the disallowance was not justified and directed its deletion.2. Depreciation on UPS:The assessee claimed depreciation on UPS at 60%, treating it as part of the computer system. The AO allowed depreciation at 12.5%, treating UPS as plant and machinery. The CIT(A) upheld the AO's decision, stating that UPS cannot be categorized as a computer. The Tribunal agreed with the lower authorities, emphasizing that UPS is not an integral part of the computer system but a power supply system, and thus, not eligible for higher depreciation.3. Setting off of Losses for Deduction under Section 80HHC:The assessee contested the setting off of losses from the business of export of traded goods against the profit from the export of manufactured goods for deduction under Section 80HHC. The Tribunal dismissed this ground, citing the Supreme Court decision in IPCA Laboratories Ltd. vs. Dy. CIT, which ruled against the assessee's position.4. Charging of Interest under Section 234B:This ground was deemed consequential, and the AO was directed to consider it accordingly.5. Exclusion of Excise Duty from Total Turnover for Deduction under Section 80HHC:The CIT(A) directed the AO to exclude excise duty from the total turnover while computing the deduction under Section 80HHC. The Tribunal upheld this decision, referencing its earlier ruling in the assessee's favor and the dismissal of the Department's appeal by the High Court.6. Disallowance of Advertisement Expenses:The AO disallowed 50% of the advertisement expenses, arguing that they benefited the non-resident parent company, Nestle SA. The CIT(A) reversed this disallowance, stating that the expenses were incurred wholly and exclusively for the assessee's business in India. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were for promoting the assessee's products in India and were not paid to any related party of Nestle SA. The Tribunal emphasized that incidental benefits to a third party do not disqualify the expenses from being deductible if they are incurred for the business's purpose.Conclusion:The Tribunal partly allowed the assessee's appeal by deleting the disallowance of royalty payments and confirming the exclusion of excise duty from the total turnover for Section 80HHC deduction. It upheld the lower depreciation rate on UPS and the setting off of losses for Section 80HHC deduction, and it dismissed the Department's appeal on advertisement expenses.