2015 (1) TMI 240 - HC - Income Tax

Treatment of 25% of Royalty Capital expenses or not Royalty payments made for transfer of technical knowhow for manufacturing process in engineering input scientific and practical information and formula research data design and manufacturing procedure know how raw material data expertise specifications for designing and manufacturing to Herbalife International Incorporate Held that - The two provisions have not been looked into by any of the authorities - the provisions disclose that the agreement entered into between the parties provides for renewal automatically - Clause 6.2 makes it abundantly clear that no proprietary interest shall be transferred to the assessee in respect of the files, lists, records, documents, drawings, specifications and other technical information which was furnished to the assessee by the licensor - it cannot be said that the assessee got any enduring benefit in the agreement which is a condition precedent for treating the payment as capital expenditure thus, the Tribunal passed the order and held the entire amount as revenue expenditure Decided against revenue.

Summary

Issues:
1. Treatment of royalty payments as capital or revenue expenditure.

Analysis:
The case involves an appeal by the Revenue against the order of the Appellate Authority setting aside the Assessing Authority's decision to treat 25% of royalty paid as capital expenditure. The main issue revolves around whether royalty payments made for transfer of technical know-how can be considered as capital in nature. The assessee claimed expenses of a specific amount on account of royalty paid towards a particular company and considered it as revenue expenditure. The Assessing Authority viewed the benefit conferred on the assessee as enduring, leading to a partial treatment of the expense as capital. This decision was based on precedents like the Southern Switch Gare Ltd. case and a judgment of the Madras High Court. However, the Appellate Authority disagreed, stating that the Apex Court's judgment did not apply to the current case as the revenue had previously accepted the royalty as revenue expenditure. The Tribunal upheld this decision, leading to the Revenue's appeal before the High Court.

The High Court analyzed the clauses of the License and Technical Assistance agreement between the parties. Clauses 6.2, 7.1, 7.2, and 7.3 were crucial in determining the nature of the agreement. Clause 6.2 explicitly stated that the licensee would not acquire any right, title, or interest in the technical information provided by the licensor. Additionally, clauses regarding termination and renewal indicated that the agreement did not confer any enduring benefit to the assessee. These clauses were not considered by the lower authorities. Based on the agreement's provisions and the absence of enduring benefits, the High Court concluded that the entire amount of royalty should be treated as revenue expenditure. Consequently, the appeal by the Revenue was dismissed, and the substantial question of law was answered in favor of the assessee.

In conclusion, the High Court's judgment clarified the treatment of royalty payments as revenue expenditure based on the specific agreement's terms and the absence of enduring benefits to the assessee. The decision highlighted the importance of analyzing contractual clauses to determine the nature of expenses and upheld the Appellate Authority's ruling in favor of the assessee.