Royalty Expenses paid by Mercedes Benz India to Daimler AG Deductible from Business Income: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune bench has held that the royalty expenses incurred by Mercedes Benz India to Daimler AG is deductible from the business income of the Company as the same constitute “revenue expenditure” under the provisions of the Income Tax Act, 1961.

The assessee, Mercedes Benz India Pvt. Ltd., is a company incorporated under the provisions of the Companies Act, 1956 and is mainly engaged in the manufacture and sale of Mercedes Benz passenger cars in the Indian market MB India currently manufacturing E.C.S. GL class and CLA class of passenger cars in India. MB India is required to pay to Daimler AG, an annual royalty at 5% of the value addition on licensed vehicles sold after 1 January 1999. The agreement gets amended from time to time to amend/extend the scope by adding or deleting vehicles models, as per Article 13 of the agreement between the Company and Daimler AG. The Assessing Officer disallowed the expenses by holding that the same is capital in nature.

A division bench of the Tribunal consists of Shri Inturi Rama Rao, AM and Shri Partha Sarathi Chaudhuri, JM observed that “from the above terms and conditions, it is clear that MB India’s rights under the agreement ends on termination of the agreement. It also evident that MB India has neither acquired any assets on an outright basis nor secured any enduring advantage. The benefit secured by MB India is essentially a license right to use the know-how for the period of the agreement and the royalty expenditure in this regard is therefore revenue in nature.”

Allowing the plea of the assessee based on the earlier decisions of the Tribunal in similar cases, the Tribunal held that “Further, the assessee submitted that the facts of the ground have already been considered in A.Y. 2002-03 to A.Y. 2013-14 and A.Y. 2014-15. In respect of the said issue in A.Y. 2002-03 the co-ordinate Bench Pune held that the royalty paid MB India is revenue expenditure. Respectfully following the aforesaid decision of Pune Tribunal in assessee‘s own case on the same parity of reasoning, facts and circumstances, we hold that the royalty expenditure in this regard is revenue in nature.”

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