ITAT directs AO to delete Addition on account of Capitalisation of Royalty Expenses by Holding it to be Revenue in Nature

In a major relief to Honda Motorcycle and Scooter India Pvt. Ltd, the Delhi Bench of Income Tax Appellate Tribunal (ITAT) directed the AO to delete Addition on account of capitalization of royalty expenses by holding it to be revenue in nature.

Facts of the case:-

The Assessee is a subsidiary of Honda Motor Co Ltd Japan, engaged in the business of manufacture and sale of motorcycles and Scooters. The assessee has entered into certain international transactions with its associated enterprise and therefore reference was made to the transfer pricing officer to determine the arm’s-length price in respect of international transactions undertaken by the assessee.

The assessee has raised the issue in respect of capitalization of the royalty expenses paid to him the amount of Japan wherein the assessee has paid a royalty expenditure of Rs 8,488,135,369/– in lieu of granting license Under the royalty and technical knowhow agreement and INR Rs 2,331,540,470/– in lieu of granting technical guidance Under the technical know-how agreement. The assessee has claimed that it did not acquire any new asset or any new enduring benefit from the payment made Under the agreement.

Conclusion:-

The Coram of Judicial Member, Amit Shukla, and Accountant Member, Prashant Maharishi noted that the assessee was already engaged in the manufacturing of motorcycle and Scooter and payment of royalty expenses was not with respect to setting up of manufacturing facility.

The ITAT found that find that this issue is squarely covered in favor of the assessee by the decision of the coordinate bench in the assessee’s own case for the assessment year 2015 -16 and directed the AO to delete the addition of Rs. 1,591,781,250/– on account of capitalization of royalty expenses holding it to be revenue in nature.

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