Relief for Dalmia Bharat: ITAT Rules Payment for Technical Knowhow on Manufacturing Refractories is Revenue Expenditure, Not Capital [Read Order]
Observing that the payment for technical assistance aimed at improving the existing manufacturing process and efficiency, the Tribunal ruled the entire expenditure was revenue in nature.
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the amount to be a fully deductible revenue expenditure regarding the disallowance of payments made for acquiring technical know-how for its refractory division.
Dalmia Bharat Ltd (assessee) in the case related to Assessment Year 2007-08, during which the assessee made payments totaling ₹63,69,932 to individuals, including Mr. Glenn Ray Trapp, Mr. Guntur Maercker, and Prof. Hi Limpu, to secure technical assistance for the manufacture of continuous casting refractories.
The objective was to improve product quality, cycle time, and reduce manufacturing costs. The Assessing Officer (AO) had treated this payment as a capital expenditure for acquiring an intangible asset (technical know-how) under the Income Tax Act, 1961.
Consequently, the AO allowed only 25% depreciation and disallowed the balance amount of ₹52,61,434. Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of the Income Tax (appeals)[CIT(A)]. The CIT(A)'s order confirmed this view.
Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The assessee's counsel argued that this was a recurring issue and was already covered in the assessee's favor by the Coordinate Bench of the Tribunal in preceding assessment years (AY 2005-06 and 2006-07).
The two-member bench comprising Vikas Awasthy (Judicial Member) and Naveen Chandra (Accountant Member) observed that the agreements clearly demonstrated the expenditure was incurred for improving the existing manufacturing process of continuous casting activities, aimed at increasing efficiency and profitability, rather than acquiring a new capital asset.
Quoting the finding from the preceding years' order, the Tribunal concluded that the assessee has not acquired any capital asset nor any enduring benefit in this case. The tribunal held that the expenditure in question is in the revenue field.
Since the issue was identical and covered by the Tribunal's own earlier binding precedent, the tribunal directed the full amount of the technical know-how payment to be treated as revenue expenditure. The appeal of the assessee was partly allowed.
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