Cess on Royalty Payment is Deductible when Entire Amount of Royalty Paid was Deleted: ITAT Grants Relief to Maruti Suzuki [Read Order]

While granting relief the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) has held that Cess on royalty payment is deductible when the entire amount of royalty paid was deleted.

Maruti Suzuki India Ltd, the assessee challenged the disallowance of R&D cess on royalty holding that the cess also partakes the character of the royalty without appreciating that royalty was paid to SMC wherein R&D cess was paid to the Indian Government.

During the year under consideration, the appellant company claimed a net deduction of Rs.43,79,33,132/- on account of R&D cess on royalty.  The expenditure on R&D cess on royalty for the year amounted to Rs.45,18,78,312/- on which a sum of Rs.1,39,45,180/- was disallowed u/s 43B of the Act by the appellant in return for income.

The AO has disallowed the entire payment of the R&D cess on the ground that since the entire royalty expenditure is a capital expenditure, therefore, cess on royalty also needs to be capitalized.  Also, the benefit of suo-moto disallowance made by the assessee u/s 43B of the Act was denied by the AO.  The AO computed the disallowance out of R&D cess amounting to Rs.33.89 crores.

As per the provision of Land Research and Development, a cess is imposed on the import of technology by the Government of India to pay R&D cess on the payment of royalty.  Such R&D cess being a statutory payment is governed by section 43B of the Act which is a separate code in itself and overrides other provisions of the Act.

A Coram comprising of Shri Shamim Yahya, Accountant Member & Shri Kul Bharat, Judicial Member allowed a deduction for the entire amount of royalty paid by the assessee during the year by deleting the TP adjustment and also overturning the action of the AO in treating the remaining half part as capital expenditure, the consequential amount of cess on royalty payment automatically becomes deductible. Further directed the AO to delete the impugned disallowance and allow the claim of the Assessee Company.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates