2010 (2) TMI 770 - AT - Income Tax

Payment of royalty for technical knowhow as capital expenditure. - held that - Payment of royalty based on the turnover of every year at certain percentage on account of providing technical know-how informations and documentations is of revenue in character. - Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the payment of royalty for technical know-how should be treated as capital expenditure or revenue expenditure.

Detailed Analysis:

Issue 1: Treatment of Royalty Payment for Technical Know-How

Background and Facts:
The revenue appealed against the order dated 31.08.2009 passed by the CIT(A), which pertained to the assessment year 2001-02. The original assessment was completed on 09.02.2004, and the case was later reopened under section 147. The Assessing Officer (A.O.) noticed that the assessee company had debited Rs. 131.81 lakhs in the profit and loss account on account of royalty paid to a foreign company. The A.O. proposed that 25% of the royalty payment should be treated as capital expenditure, referencing the Supreme Court decision in Southern Switchgear Ltd. vs. CIT (1997) 232 ITR 359 (SC).

Assessee's Argument:
The assessee argued that the facts of their case were distinguishable from Southern Switchgear Ltd. The payment in the Southern Switchgear case was a lump sum for enduring benefits, whereas the royalty paid by the assessee was based on "Net Sales Price" and was for specific technical assistance related to power plant improvements, without providing enduring benefits. The agreement with Siemens was non-exclusive, non-transferable, and specific to particular projects, unlike the perpetual rights in the Southern Switchgear case.

CIT(A)'s Decision:
The CIT(A) sided with the assessee, stating the royalty payments were revenue in nature, not capital. The CIT(A) considered various judicial precedents including:
- CIT vs. Ciba of India Ltd., (1968) 69 ITR 692 (SC)
- CIT vs. Gujarat Carbon Ltd., (2002) 254 ITR 294 (Guj)
- CIT vs. Jyoti Electric Motors Ltd., (2002) 255 ITR 245 (Guj)
- CIT vs. J.K. Synthetic, 176 Taxman 355 = 309 ITR 371 (Del)

Revenue's Argument:
The revenue reiterated the A.O.'s stance, relying on the Supreme Court decision in Southern Switchgear Ltd., arguing that the facts were similar and thus the royalty payment should be treated as capital expenditure.

Tribunal's Analysis:
The Tribunal reviewed the facts, the agreement, and the judicial precedents. The Tribunal noted that:
- The assessee's business involved renovation and modernization of old power plants.
- The royalty payments were based on turnover and were for specific technical assistance, not for enduring benefits.
- The agreement with Siemens was non-exclusive and non-transferable, with no provision for sublicensing or perpetual use of the technical know-how.

The Tribunal referenced the Delhi High Court's decisions in:
- CIT vs. J.K. Synthetic Ltd. (2009) 309 ITR 371 (Delhi)
- CIT vs. Sharda Motors Industrial Ltd. (2009) 319 ITR 109 (Delhi)
- Climate Systems India Ltd. vs. CIT (2009) 319 ITR 113 (Delhi)

These cases established that payments for access to technical knowledge, as opposed to absolute transfer, are typically revenue expenditures. The Tribunal concluded that the royalty payments were revenue in nature, as they were continuous, based on turnover, and did not confer enduring benefits.

Conclusion:
The Tribunal upheld the CIT(A)'s order, rejecting the revenue's appeal. The royalty payments were deemed revenue expenditures, not capital expenditures.

Final Decision:
The appeal filed by the revenue was dismissed, and the decision was pronounced in the open court on 12th February, 2010.