2015 (5) TMI 584 - AT - Income Tax

Disallowance of claim of royalty payment - Revenue or capital expenditure - payment made by the assessee in pursuance of the agreement entered by the assessee with PPME - Held that - In the instant case, the duration of the agreement was utmost for two years only. The assessee does not become owner of the technical knowhow. It had to return back all data, information etc. on completion of the agreement. It has to maintain strict confidentiality about the technology. Further, the assessee itself has capitalised the technology transfer fee. The royalty amount is paid to provide operational and commercial support. Under these set of facts, we are of the view that the royalty amount paid by the assessee should be treated as revenue expenditure only. We find support for our view from the decision rendered by the Hon ble Supreme Court in the case of CIT Vs. I.A.E.C (pumps) Ltd (1997 (4) TMI 14 - SUPREME Court ). - Decided in favour of assessee.

Summary

Issues Involved:
1. Nature of royalty payment (capital vs. revenue expenditure)
2. Levy of interest under sections 234B and 234C

Issue-wise Detailed Analysis:

1. Nature of Royalty Payment (Capital vs. Revenue Expenditure):

The primary issue revolves around whether the royalty payment made by the assessee should be classified as capital expenditure or revenue expenditure. The assessee, engaged in the insulation processing of pipes for the oil and gas industry, entered into an agreement with M/s Perma Pipe Middle East FZC (PPME) to acquire necessary technology. The agreement stipulated a lump sum payment for technology transfer and a royalty of 5% of the gross revenue from the contract. While the assessee capitalized the technology transfer fee, it claimed the royalty amount as revenue expenditure. However, the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the royalty payment was for the transfer of marketing and commercial support, experience, and skill, and thus constituted capital expenditure.

The AO/DRP relied on the Supreme Court decision in Southern Switchgear Ltd Vs. CIT, which held that payments for technical know-how constituted capital expenditure. The assessee contended that the agreement was short-term (maximum of two years), the ownership of the technology remained with PPME, and all information had to be returned upon termination. The royalty payment was for operational and commercial support, not for acquiring a capital asset.

The Tribunal examined the agreement clauses and found that the assessee did not own the technical know-how, had to maintain confidentiality, and return all data upon termination. The royalty payment was for ongoing operational support, not for acquiring a capital asset. The Tribunal distinguished the present case from Southern Switchgear Ltd, where the assessee had exclusive rights and continued use of the technology post-agreement. The Tribunal found support in the Supreme Court decision in CIT Vs. I.A.E.C (Pumps) Ltd, where payments for a license to use patents and designs were treated as revenue expenditure.

Based on these findings, the Tribunal concluded that the royalty payment should be treated as revenue expenditure and directed the AO to allow it as such.

2. Levy of Interest under Sections 234B and 234C:

The assessee also challenged the levy of interest under sections 234B and 234C. The Tribunal noted that the levy of interest is consequential in nature and does not require separate adjudication.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the AO to treat the royalty payment as revenue expenditure and noting that the levy of interest under sections 234B and 234C is consequential. The order was pronounced in the open court on 21st April 2015.