2016 (1) TMI 774 - AT - Income Tax

Royalty payment - revenue expenditure OR capital expenditure - Held that - A bare perusal of the terms and conditions of Royalty Agreement entered into between the assessee and NMESA WLL goes to prove that the Royalty in the case in question was exclusively for the purpose of use of trademark, trading norms and know how without any acquisition of any capital research in the year under consideration, thus not of any enduring benefit for the assessee so as to consider any part of royalty expenditure as capital expenditure. In the assessee s own case for the Assessment Year 2005-06 2011 (7) TMI 65 - DELHI HIGH COURT has categorically held that the payment of royalty is revenue expenditure. - Decided against revenue.

Summary

Issues:
1. Treatment of royalty payment as revenue expenditure instead of capital expenditure.

Analysis:
The case involved a dispute over the treatment of royalty payment of Rs. 79,61,325 as revenue expenditure rather than capital expenditure for the Assessment Year 2009-10. The Revenue contended that the payment should be considered capital expenditure due to the enduring benefit it provides to the assessee. The assessee argued that the payment was revenue expenditure based on previous judicial decisions and the nature of the agreement. The Tribunal had to determine whether the royalty payment should be treated as revenue or capital expenditure.

The Tribunal examined the terms of the agreement between the assessee and the licensor to ascertain the purpose of the royalty payment. It was established that the royalty was solely for the use of trademark, trading norms, and know-how without involving any acquisition of capital assets. The Tribunal referenced a previous judgment by the Jurisdictional High Court which categorically held that royalty payments are revenue expenditure if they do not confer enduring benefits to the assessee. Based on this analysis, the Tribunal concluded that the royalty payment in question did not result in any enduring benefit for the assessee, thus qualifying as revenue expenditure.

The Tribunal also considered the decision of the Jurisdictional High Court in a similar case for the Assessment Year 2005-06, which emphasized that royalty payments based on turnover and for the use of trademarks and know-how are revenue expenditures. The Court's ruling highlighted that ownership rights of the trade mark and know-how remained with the licensor, and the assessee was not entitled to exclusive ownership. Therefore, the expenditure incurred as royalty was deemed to be revenue expenditure under Section 37(1) of the Act.

Given the clear legal precedent and the specific terms of the agreement in question, the Tribunal upheld the decision of the Ld. CIT(A) to treat the royalty payment as revenue expenditure. The Tribunal found that the case was squarely covered by previous judgments and the principles established therein. Consequently, the appeal by the Revenue was dismissed, affirming the treatment of the royalty payment as revenue expenditure.

In conclusion, the Tribunal's detailed analysis of the agreement terms, legal precedents, and the nature of the royalty payment led to the determination that the payment should be classified as revenue expenditure rather than capital expenditure, in line with established judicial interpretations and the specific circumstances of the case.