2016 (10) TMI 1239 - AT - Income Tax

Payment of royalty - revenue or capital expenditure - Held that - We find that the Revenue has accepted the royalty as revenue expenditure in the preceding as well as subsequent years. Thus there would be no justification for treating the same to be capital expenditure in some of the intervening years Case of Radhasoami Satsang Vs. CIT 1991 (11) TMI 2 - SUPREME COURT would be squarely applicable to the facts of the assessee s case because the payment of royalty in the case of the assessee is also on year to year basis on the net sales of the assessee and at no point of time the assessee is entitled to become the exclusive owner of know-how and the trademark. - Decided against revenue

Summary

Issues:
1. Treatment of royalty payment as revenue expenditure.
2. Comparison of facts with relevant legal judgments.

Issue 1: Treatment of royalty payment as revenue expenditure
The case involved an appeal by the Revenue against the order of the CIT(A) concerning the treatment of royalty payments made by the assessee to its associated enterprises as revenue expenditure for the assessment years 2008-09 and 2009-10. The assessee, an assembly unit supplying auto components to OEMs, had entered into a technology transfer agreement with Mitsubishi, granting non-exclusive rights to manufacture, use, and sell licensed products. The Assessing Officer disallowed the royalty payment as capital expenditure, but the CIT(A) allowed it as revenue expenditure. The Revenue contended that the payment resulted in securing an enduring benefit. However, the learned counsel argued that the Revenue had consistently accepted the royalty as revenue expenditure in previous and subsequent years, indicating its recurring nature based on a percentage of sales. The Tribunal noted the Revenue's inconsistent treatment and cited legal precedents supporting the deductibility of such payments as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, emphasizing the recurring and non-exclusive nature of the payment, in line with previous assessments and legal principles.

Issue 2: Comparison of facts with relevant legal judgments
The Tribunal considered various legal judgments, including decisions by the Hon'ble Supreme Court and the Delhi High Court, to support its conclusion. It referenced the case law to establish that the ownership rights of the trademark and know-how remained with the foreign company, and the assessee had no entitlement to exclusive ownership. The Tribunal highlighted the recurring nature of the royalty payment based on annual sales and the absence of any transfer of assets to the assessee. Additionally, the Tribunal cited a decision by the Dispute Resolution Panel (DRP) in a subsequent assessment year, which upheld the revenue nature of the royalty payment, leading to its acceptance by the Revenue. By aligning with the legal principles and consistent treatment of such payments, the Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s order, affirming the royalty payment as revenue expenditure.

In conclusion, the Tribunal's judgment emphasized the recurring and non-exclusive nature of the royalty payment, consistent treatment by the Revenue in previous and subsequent years, and alignment with legal precedents supporting the deductibility of such payments as revenue expenditure.