An Amount Paid Based on a Percentage of Turnover or Profit is Revenue in Nature: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that an amount paid based on a percentage of turnover or profit, is revenue in nature.

The aforesaid observation was made by the Tribunal when an appeal was filed before it by the Revenue, as against the order of the CIT(A)-9, New Delhi, dated 19.03 .2018.

 The facts of the case being that the assessee company M/s Voestalpine VAE VKN India Pvt Ltd., was engaged in the business of manufacturing of CMS crossings, point & crossing/switches and castings, SG/CI casting etc., it had filed the return of income on 24 .09.2011, declaring an income of Rs.7 ,50,08,030/.

The assessee company having claimed an expenditure of Rs .2 ,41,98 ,983/- in the P&L account for the year, on account of R&D expenditure under the head “Manufacturing Expenses”, the same was treated by the AO as “capital expenditure” in nature and was brought to tax.

However, upon the assesse preferring an appeal to the CIT (A), followed by the subsequent deletion of the said addition by the CIT(A) in the assessee’s favour, the Revenue has now preferred the instant appeal before the Tribunal.

Hearing the arguments of both the parties and perusing the material available on record, the Tribunal commented:

“On examination of the details, we find that these expenses are incurred during the normal course of business.”

“The expenditure such as annual technology licence fee, technical support services, assistance in canvassing orders, marketing services which are calculated and paid on the basis of annual sales made by the assessee every year in accordance with the agreement entered between the parties, cannot be treated as capital expenditure. Here, the Assessing Officer misread the head “R&D expenditure” which in fact was a manufacturing expenditure, it observed.

And further adding to its observation, the Bench noted:

“On this issue, we are guided by the judgment of the Hon’ble Supreme Court in the case of Travancore Sugar and Chemical Ltd. Vs 62 ITR 566, wherein it was held that whenever an amount is paid based on a percentage of turnover or profit, it would have no relation to the capital value of the assesse.

Thus, finally dismissing the Revenue’s appeal, the Tribunal ruled:

“The facts in the instant case reveal that the payments have been made for utilization of services on annual basis, taking the turnover as baseline for computation. And since no augmentation of the capital asset or transfer of technology or any right thereof is accrued to the assessee, we hold that the expenditure ought to be treated as revenue in nature.”

To Read the full text of the Order CLICK HERE

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