2010 (8) TMI 1146 - AT - Income Tax

Summary

Issues involved: Appeal by Revenue against CIT(A) order for AY 2005-06 regarding deletion of royalty payment disallowance.

Issue 1: Disallowance of royalty payment

The Revenue appealed against the CIT(A) order deleting the disallowance of royalty payment. The Tribunal noted that the assessee had acquired a non-transferable and exclusive license to technical know-how in India, paying royalty at 1.8% of the net selling price of products. The AO disallowed 25% of the royalty payment, considering it on capital account. However, the Tribunal referred to previous years' decisions and held that the payment was not for acquiring any enduring asset, but for the right to use the know-how to sell products. Citing relevant case laws, the Tribunal upheld the CIT(A)'s decision, stating that the payment was allowable expenditure and not capital in nature. As the facts were similar to previous years, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.

The Tribunal's decision was based on the interpretation of the agreement for technical know-how usage and the nature of the royalty payment. Citing relevant legal precedents, the Tribunal concluded that the payment made by the assessee was for the right and exclusive license to use the know-how, not for acquiring any enduring asset. This distinction was crucial in determining whether the payment should be treated as capital expenditure or allowable expenditure. By analyzing the terms of the agreement and previous judicial decisions, the Tribunal established that the payment in question was revenue expenditure and thus upheld the CIT(A)'s decision to delete the disallowance of royalty payment.

The Tribunal's reliance on previous decisions and legal principles regarding the treatment of royalty payments under similar circumstances demonstrated a consistent approach in interpreting such transactions. By referring to specific judgments of the Supreme Court and High Courts, the Tribunal justified its decision to allow the royalty payment as a revenue expenditure. The Tribunal's analysis focused on the nature of the payment, emphasizing that it was not for acquiring a capital asset but for the right to use technical know-how. This distinction was pivotal in determining the tax treatment of the payment and supported the Tribunal's decision to dismiss the Revenue's appeal against the deletion of the royalty payment disallowance for the relevant assessment year.