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2016 (3) TMI 368 - ITAT CHENNAI

2016 (3) TMI 368 - ITAT CHENNAI - TMI - Disallowance of royalty payments on account of the same being treated as capital expenditure - Held that:- Royalty payment is based on the percentage of quantum sales and it is an annual charge to be considered as business expenditure in respect of assessment year 2007-08 as held by Co-ordinate Bench in the case of India Nippon Electricals Ltd., [2016 (3) TMI 237 - ITAT CHENNAI]. It is a lump sum payment towards royalty and as such in that circumstance it .....

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ther sections will apply to this case and the assessee will not be able to claim the benefit u/s.28 of the Act. The expenditure incurred by the assessee is not for the purpose of carrying on its business, but on the other hand it is incurred for the purpose of setting up of new business which is in capital filed. Had the expenditure incurred for carrying on business which is an outgoing and assessee could claim as deduction from the profit of the business. The law has evolved considerably as a r .....

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nd it is an expenditure incurred in the capital field and it also cannot be allowed u/s.37 of the Act. Thus the loss in respect of discarded project had written off by the assessee during the previous year is not allowable expenditure as business deduction and it cannot be allowed. Being so, we are of the opinion that lower authorities are justified in rejecting the claim of the assessee. - Decided against assessee - I.T.A.Nos.1281 & 1282/Mds./2014 - Dated:- 10-2-2016 - SHRI CHANDRA POOJARI, ACC .....

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r and disposed off by this common order for the sake of convenience. 2. The first common ground in both the appeals is with regard to disallowance of royalty payments on account of the same being treated as capital expenditure. 3. The brief facts of the issue are that the assessee company debited in its P&L account amounts of ₹ 1,04,10,665/- & ₹ 78,89,750/- under the head royalty paid to Sango Co. Ltd, Japan and Emcon Technologies, Germany for assessment year 2008-09 & 20 .....

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ppeal, the CIT(A) confirmed the action of the AO. Against this, the assessee is in appeal before us. 4. The ld.A.R submitted before us that the royalty was paid on the basis of a particular percentage of the sales made in each year. Hence, it amounts to a revenue expenditure and allowable in its entirety. The ld.A.R further submitted that only the one time up-front payment of royalty at the beginning of the agreement, if any paid, is to be considered as capital expenditure. Its payment for royal .....

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nt of M/s.India Nippon Electricals Ltd. in ITA No.1706/Mds./2014 vide order dated 18.12.2015 wherein it was held that:- we have carefully gone through the judgment of the jurisdictional High Court in the case of Southern Switch Gear Ltd (supra). In that case the foreign company was required to maintain the assessee s factory in India. Being so, it was held that the assessee got the enduring benefit and it is a capital expenditure. However, in the present case, though the agreement was for 10 yea .....

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and sale of automobile parts and components for subsequent periods, after the expiry of original period of license and it was not technical know-how for setting up a new plant or for manufacturing a completely new product with aid and assistance of foreign company, payment made was purely revenue in nature, more so, when Department had for the nine earlier assessment years accepted the fact that the payment made towards royalty was revenue expenditure and had not raised dispute thereon. 5. Furth .....

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two types of royalty payments. The first category is a one time up-front payment of royalty at the beginning of the agreement. This category forms a capital expenditure because the benefits of the payments accrue to the assessee for a number of years. The second category is annual payment , which is normally calculated at a fixed percentage of the assessee s manufactures and sale of the items. He further emphaised that the present case before us, the royalty payment falls under he second categor .....

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during in nature, fall under the category of capital expenses of intangible block of assets of 25% depreciation. Further he relied in the decision of the Hon ble High Court of Madras in the case of M/s.Southern Switch Gear Ltd. reported in 148 ITR 272 (Mad.) and argued that the facts of the assessee s case are identical to those involved in that case of M/s.Southern Switch Gear Ltd. The facts involved in the present case are exactly identical to the above decision of jurisdictional High Court, a .....

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tion on the royalty (intangible asset) in those years, as a result of which the assessee will not get an opportunity to recover the cost of the intangible asset, which, lile any other asset, will get depreciated over a period oi use owing to the changes in technology etc. Consequent to 01.04.1998, the royalty payments, being one of the intangible assets, is entitled for depreciation at 25%. Thus, the assessee gets a benefit of depreciation i.e 25% on the royalty payments. Therefore, as the asses .....

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, the decision of the Apex Court confirming that the royalty payments are capital expenditure in nature holds good, even after 01.04.1998. In view of the above discussions, the assessing Officer is justified in treating the royalty payments of Rs.l,04,10,665/- and ₹ 78,89,750/-, during the financial years 2007-08 & 2008-09, as capital expenditure and disallowing 75% of the same after allowing depreciation @ 25%. He prayed that the action of the Assessing Officer is as per the law and c .....

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as in that case. It is a lump sum payment towards royalty and as such in that circumstance it was held that it is an capital expenditure and depreciation was granted. Accordingly, this ground of the assessee is allowed. 8. The second ground in A.Y 2009-10 is with regard to confirm the disallowance of the capital work in progress written off. 9. The brief facts of the case relating to this ground are that the assessee was constructing a factory premises at Singur in West Bengal. Consequent to the .....

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y the local people and hence, the project was abandoned. He further pleaded that since the proposed project was in line with the existing business of the assessee, the entire capital work-in-progress, on abandoning the project, becomes an allowable revenue expenditure and accordingly, debited the same in its P&L account as capital work-inprogress written off. He also relied the case laws reported in 332 ITR 592(Del.), 263 ITR 357(Gau.) and 175 ITR 72 (Raj.). Further he also relied on the dec .....

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ed , the expenditure incurred for it should be considered as a revenue expenditure. 11. Ld.D.R on the other hand submitted that under the provisions of the Act , only the revenue expenses are allowable deductions, while computing the taxable income under the head income from business. The expenses in capital naure cannot be allowed as revenue expenses under any of the sections 30 to 37 of the Ac. However, there are certain expenses, which are primarily capital expenses in nature, but allowable a .....

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argeable to tax under the head income from business . He further submitted that the case laws cited on by the assessee are with respect to the expenses which are preliminary expenses in nature. In such cases, if the project fails to take off or abandoned, the said expenses are to be allowed as revenue expenditure. These expenses in normal course, if the projects materialize, are to be allowed as amortization over a period of five years from the commencement of the business. However, if the proje .....

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ritten off, even in the cases of abandoned projects, etc. cannot be allowed as an allowable deduction. Therefore, he pleaded that the claim of the assessee s deduction on account of capital work-in - progress written off is not allowable. 12. We have heard both the parties and perused the material on record. In this case, assessee incurred an expenditure of ₹ 89,89,768/- towards setting up a factory at Singur in West Bengal. Due to unrest and protest by the local people, assessee had aband .....

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