2013 (11) TMI 570 - AT - Income Tax

Capital or revenue expenses - Disallowance of royalty - Whether the assessee has acquired a right to use the technology and licence during the assessment years - Held that - From the perusal of the agreement it is found that KMC granted the assessee an exclusive right to manufacture and sell the products in India using the licenced technology provided. An exclusive right has been conferred on the assessee for manufacturing and selling the products in India - it is a case where royalty was paid initially and also running expenses towards royalty are being paid year after year. As per this agreement for transfer of know-how as technical aid, initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee - The assessee-company has entered into a technical licence agreement with KMC, which had a 50% shareholding in the assessee-company, to manufacture and sell the contract products in India using licenced technology. The assessee-company paid a lump sum amount of 9 lakhs US Dollars to KMC to get this technology. This amount was paid in three instalments of 3 lakhs US Dollars from financial year 1996-97 to 1998-99. Apart from this, the assessee-company has been paying royalty @ 3.5% for products manufactured by using licenced technology supplied by KMC This royalty is paid @ 3.5% of net sales less imported components. As per this agreement, if there is no sales, no royalty is payable by the assessee. - Decided in favour of assessee.

Summary

Issues:
Assessment of royalty expenditure as revenue or capital expenditure.

Analysis:
The judgment involves multiple appeals by the assessee for different assessment years and one appeal by the Revenue for a specific year. The common issue across all appeals is the treatment of royalty expenditure incurred for using technical information from a foreign company by the assessee-company. The dispute revolves around whether these expenses should be classified as revenue expenditure, capital expenditure, or a combination of both.

The assessee, engaged in manufacturing automotive lighting equipment, paid royalties to a Japanese company for technical information under an agreement. The Assessing Officer treated the expenses as capital expenditure, granting depreciation, while the CIT(A) took a different view, considering 75% as revenue and 25% as capital. The Revenue raised a procedural objection regarding the submission of a certificate under section 35(2AB), which was ultimately deemed invalid as it was filed before the CIT(A) and not the Assessing Officer.

The Tribunal analyzed the agreement between the parties, focusing on the exclusive rights granted to the assessee for manufacturing and selling products using licensed technology. The Tribunal considered previous court decisions, including those of the Madras High Court and the Supreme Court, regarding the treatment of similar expenses as revenue or capital. The Tribunal highlighted the distinction between acquiring an asset of enduring benefit and acquiring technical know-how for day-to-day operations.

The Tribunal noted that the initial lump sum payment for technology acquisition was treated as capital expenditure under section 35AB, while the ongoing royalty payments were deemed revenue expenditure. Citing recent court judgments, including one by the Madras High Court, the Tribunal concluded that the entire royalty payments should be treated as revenue expenditure, dismissing the Revenue's appeal and allowing the appeals of the assessee.

In summary, the Tribunal ruled in favor of the assessee, holding that the royalty payments for technical information should be treated as revenue expenditure entirely, based on the specific terms of the agreement and legal precedents cited during the proceedings.