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Facts
PPAP Automotive Limited, engaged in manufacturing PVC Profiles, filed its return for AY 2017-18. The Assessing Officer (AO) disallowed 25% of royalty payments made by the assessee for technical assistance, treating it as capital expenditure. The assessee appealed, contending that the royalty payment is revenue expenditure and that similar disallowances in prior assessment years had been deleted by the Tribunal.
Held
The Tribunal noted that the issue of royalty payments being revenue expenditure was already decided in the assessee's favour in its own case for several past assessment years (AYs 2005-06 to 2012-13). Following these precedents, and observing no new facts or legal positions, the Tribunal allowed the assessee's grounds of appeal.
Key Issues
Whether 25% of royalty payments for technical assistance constitutes capital expenditure or revenue expenditure for disallowance purposes.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, DELHI BENCH “F”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI VIMAL KUMAR
O R D E R PER M. BALAGANESH, A. M.:
1. 1. The appeal in AY 2017-18, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as „ld. NFAC)‟, in short] in Appeal No. ITBA/NFAC/S/250/2023- 24/1058800334(1) dated 15.12.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 04.01.2020 by the Assessing Officer.
2. The assessee has raised the following grounds of appeal before us:-
1. The order passed by the Ld. CIT (A) is bad in law, wrong on facts and against the principles of natural justice.
2. That the Ld. CIT(A) has erred in law and on facts in confirming the disallowance of Rs. 88,67,134/- being 25 percent of the expenditure incurred towards royalty made by the Ld. AO by holding the same as capital expenditure.
3. That the Ld. CIT(A) has erred in confirming the aforesaid disallowance by ignoring the explanation and evidences brought on record by the appellant PPAP Automotive Limited company and the fact that no advantage of enduring nature has accrued to the appellant company.
4. That the Ld. CIT(A) has confirmed the disallowed royalty holding that the same is partly of capital nature without considering the various judicial pronouncements of the courts wherein it has been held that where royalty is paid as a percentage of annual sales then in such cases royalty is to be allowed in full as a revenue expenditure.
The Ld. CIT(A) has confirmed the disallowance out of Royalty paid holding that the aforesaid payment is partly capital in nature without appreciating the fact that a similar disallowance of royalty was made in earlier assessment years which has already been deleted by the Honourable CIT(A) and Honourable ITAT in full and therefore no disallowance is warranted in Assessment year 2017-18. The Ld. CIT(A) has erred in not following the decision of the Hon'ble ITAT in the appellant's own case for AY 2005-06, AY 2006-07, AY 2007-08, AY 2008-09, AY 2009-10, AY 2010-11, AY 2011-12 and AY 2012-13, wherein in identical circumstances, it has been held that entire royalty paid represents revenue expenditure.”
We have heard the rival submissions and perused the material available on record. The assessee company is engaged in the business of manufacturing and trading of PVC Profiles used in automobiles, refrigeration, and other industries. The return of income for the Asst Year 2017-18 was filed by the assessee declaring total income of Rs. 34,47,66,600/- on 1.11.2017. The assessee entered into an agreement with M/s Tokai Kogyo Co. Ltd., Japan and M/s Nissen Chemitech Corporation, Japan to procure technical assistance relating to know how, training, education and obligation of technology. The agreement was entered into on 01.11.2000 and the same was effective up to 31.10.2005, which was renewed from time to time for further period. Before the lower authorities, the assessee submitted the renewed agreement that is relevant for the year under consideration. Pursuant to this agreement, the assessee was required to make royalty payment at an agreed percentage of net sale price. This royalty payment was claimed as deduction by the assessee company. The ld AO disallowed 25% of such royalty payment holding the same as capital in nature. This issue is no longer res integra in view of the decision rendered in assessee‟s own case by the order of this tribunal for various years. The relevant operative portion of the tribunal order for assessment year 2005- 06 in dated 30.04.2010 is reproduced herein below:-
PPAP Automotive Limited “4. We have considered the rival contentions and gone through the terms and conditions of the agreement entered into by the assessee. We found that assessee was required to pay annually royalty at the rate of 2% of the items manufactured under this agreement and sold during the term of the said agreement. Such royalty was to be computed on half yearly basis. As the royalty payment is determined annually on the basis of quantity and value of production, the expenditure so incurred by the assessee is essentially recurring and revenue in nature. However, the AO has treated 25% of such payment as capital in nature. The expenditure so claimed is charged on the products manufactured by the assessee company and the same is not incurred for acquiring a process or design or technology which can be utilized by the assessce for years to come so as to categorize such expenditure as Capital in nature. Nothing was brought on record by the learned DR to controvert the findings of the CIT(A) recorded at pages 5 & 6 of appellate order. We therefore do not find any reason to interfere in the order of CIT(A) for allowing the entire payment of royalty as revenue expenditure.”