2014 (8) TMI 1027 - AT - Income Tax

Royalty payment - treated as revenue expenditure or capital expenditure - Held that - The assessee paid royalty @ 1% of the sales effected by it pursuant to an Agreement which was made on 27.12.2007. This Agreement, a copy of which is available on record, makes it clear that its duration is five years subject to further renewal. Clause 5.2 of the Agreement provides that it may be terminated at any time by mutual consent of the parties. Clause 2.1 of the Agreement makes it explicitly clear that it grants the assessee a non-exclusive right to use the trade mark and trade name in the licensed business. The above features deduced from the Agreement amply show that the character of royalty paid by the assessee to its Associated enterprise is nothing, but revenue. The Tribunal in several cases of the assessee s group concerns has held such amount to be revenue in nature. - Decided in favour of assessee

Summary

Issues:
1. Characterization of royalty payment as revenue or capital expenditure.

Analysis:
The appeal before the Appellate Tribunal ITAT DELHI concerned the characterization of royalty payment of Rs. 8,64,67,558 as either revenue or capital expenditure for the assessment year 2009-10. The Assessing Officer (AO) treated the amount as capital expenditure, while the assessee claimed it as revenue expenditure. The key contention revolved around the nature of the royalty payment made to an Associate enterprise, M/s G4S Regional Consultancy Services. The AO's decision was based on the belief that the amount should be considered capital expenditure. However, the ld. CIT(A) ruled in favor of the assessee, citing past Tribunal decisions and affirmations by the Hon'ble Delhi High Court in similar cases within the assessee's group concerns.

Upon reviewing the facts and the Agreement under which the royalty payment was made, the Tribunal observed that the payment was calculated at 1% of the sales under a five-year Agreement with the possibility of renewal. The Agreement granted the assessee a non-exclusive right to use the trade mark and trade name in the licensed business. These terms indicated that the royalty payment was revenue in nature. The Tribunal noted that in previous cases involving the assessee's group concerns, similar royalty payments had been considered revenue expenditure. The ld. CIT(A) specifically referenced the Hon'ble Delhi High Court's decisions in favor of the assessee for other assessment years, further supporting the revenue nature of the royalty payment.

In light of the consistent precedents set by the Tribunal and the favorable decisions by the Hon'ble Delhi High Court in similar cases, the Appellate Tribunal upheld the ld. CIT(A)'s order, dismissing the appeal by the Revenue. The judgment reaffirmed the characterization of the royalty payment as revenue expenditure, emphasizing the Agreement's terms and the established legal interpretations in previous cases.

Overall, the judgment provides a detailed analysis of the contractual terms, the nature of the royalty payment, and the legal precedents that influenced the decision to treat the payment as revenue expenditure rather than capital expenditure.