Royalty payment and R&D on royalty both allowable as revenue expenditure

Maruti Suzuki India Ltd. Vs DCIT (ITAT Delhi)

ITAT Delhi held that royalty payment and R&D cess on royalty is interlinked. As royalty payment is allowed as revenue expenditure, R&D cess is also allowable as revenue expenditure.

Facts- AO noticed that the assessee had made payment of Royalty amounting to Rs. 1035,49,95,272/- to Suzuki Motor Corporation (“SMC”) in the year under consideration and had paid cess on Royalty amounting to Rs. 43,79,33,132/-.

AO called upon the assessee as to why Royalty payment should not be treated as capital expenditure. In response thereto, the assessee filed its reply which was rejected by the AO on the basis that the benefit derived by the assessee on such royalty payment was of enduring in nature. Thus, he disallowed payment of Rs. 592,57,95,292/- and payment of R&D Cess of Rs. 45,18,78,312/- being capital in nature.

However, the AO granted partial relief of Rs.93,92,54,794/- rectifying the order u/s 154 of the Act qua depreciation allowance. Thus, the AO after allowing relief for depreciation, made addition of Rs. 384,40,00,394/- in respect of royalty payment.

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