2021 (8) TMI 73 - AT - Income Tax

Nature of expenditure - royalty payment to FCC Co. Ltd. Japan - revenue or capital expenditure - assessee was granted non-exclusive and non-transferable right and license to use IPR technical know-how and technical information in order to manufacture and sell products and parts in India - whether any right has been given which is for use of technology or it has been given for acquiring the knowhow or transfer of technology; whether any exclusive right has accrued to the licensee or it is purely for use of technology for production and sale? - HELD THAT - No way it can be inferred that the license agreement gave any exclusive right to the licensee or any technical know-how is being transferred or it will lead to creation of any capital asset in the hands of the licensee giving enduring benefit either during the term of license or in the year of termination of license agreement. FCC Co. Japan even having 50% stake holding with the assessee company will not lead to an inference that there is exclusive or transferrable technical know-how which is being acquired by the assessee company. It is purely for use of technology for manufacturing of clutch assembly for two wheelers and four wheelers and the royalty paid based on sale percentage thereon cannot be a capital expenditure. Either having 50% control or 100% control that will not change the colour of nature of expenditure because the royalty payment is for manufacturing or sale of manufactured products using the technical information and know-how. Precisely on these facts and circumstances the jurisdictional High Court in series of judgments have held that such a nature of payment of royalty is always a revenue expenditure. Accordingly we hold that in the facts and circumstances of the case the payment of royalty as revenue expenditure and is allowable. Thus all the appeals of the revenue are dismissed.

Summary

Issues Involved:
1. Nature of Royalty Expenditure: Whether the royalty expenditure paid by the assessee to FCC Co. Ltd., Japan, is capital or revenue in nature.

Issue-wise Detailed Analysis:

Nature of Royalty Expenditure:

Facts and Background:
The assessee company, engaged in manufacturing and selling clutch assemblies for vehicles, entered into a license agreement with FCC Co. Ltd., Japan, granting non-exclusive and non-transferable rights to use Industrial Property Rights (IPRs) and technical information for manufacturing and selling products in India. The royalty was paid at 5% of the value addition made by the assessee.

Assessment Proceedings:
The Assessing Officer (AO) treated the royalty expenditure as capital in nature, relying on the Supreme Court judgment in Southern Switchgear Ltd vs CIT. The AO disallowed 75% of the total royalty expenditure for the assessment years 2009-10 to 2015-16, considering it as capital expenditure.

CIT(A) Decision:
The CIT(A) deleted the addition made by the AO, holding the royalty expenditure as revenue in nature. The CIT(A) relied on its earlier order for AY 2005-06, where it was held that the royalty paid for using non-exclusive, non-transferable technical know-how was recurring expenditure and thus revenue in nature. The CIT(A) also considered judgments from the Delhi High Court, including CIT vs. JK Synthetics Ltd. and CIT vs. Shri Ram Pistons & Rings Ltd., which supported the assessee's claim.

Department's Argument:
The Department argued that the royalty expenditure should be treated as capital in nature due to the enduring benefit arising from the License Agreement. They contended that the rights granted were effectively exclusive due to the licensor's 50% stake in the assessee, and the agreement's termination clause implied an enduring benefit.

Assessee's Argument:
The assessee argued that the royalty expenditure was for non-exclusive, non-transferable use of technical know-how, and thus revenue in nature. They cited various judgments, including Climate Systems India Ltd. v. CIT and CIT vs. Hero Honda Motors Ltd., where similar royalty payments were held as revenue expenditure.

Tribunal's Analysis:
The Tribunal noted that the royalty paid was recurring and based on sales, with no exclusive rights or acquisition of technical know-how. The Tribunal distinguished the case from Southern Switchgear Ltd., highlighting that the agreement in the present case did not confer any exclusive right or enduring benefit. The Tribunal referred to the Delhi High Court judgments in Climate Systems India Ltd. v. CIT and CIT vs. Hero Honda Motors Ltd., which supported treating such royalty payments as revenue expenditure.

Conclusion:
The Tribunal held that the royalty expenditure was revenue in nature, as it was for the use of technology without any exclusive right or acquisition of know-how. The appeals of the Department were dismissed, and the royalty expenditure was allowed as revenue expenditure.

Order:
All appeals of the Department were dismissed, and the royalty expenditure was held to be revenue in nature. The order was pronounced in the open court on 30/07/2021.