2022 (4) TMI 612 - AT - Income Tax

Disallowance of expenditure as capital expenditure being 25% of royalty amount paid - account of use of technical know-how and technical process of licensor - HELD THAT - All the features of the agreement make it unequivocal that what the assessee, in essence, has acquired under the agreement is a mere right to use the licensed technical know-how in question. A mere access to the technical knowledge by virtue of such license agreement, in our view, could not permit the revenue authorities to artificially assume certain part of the expenditure as advantage of capital nature or something akin to acquisition of any asset or advantage of enduring nature for the benefit of its business. In the case in question, it cannot be said that the Sweden Company had relinquished its command over the impugned technical know-how information in favour of the assessee in any manner. In the absence of any vested advantage to assessee or any indefeasible right, it is farfetched to hypothetically presume any component of capital expenditure implicit in the outgo towards royalty. We find considerable merit in the plea of the assessee for claiming the entire royalty expenditure for use of technical know-how as revenue expenditure. We also find that the judgment rendered in the case of CIT vs. Southern Switchgear Ltd 1983 (3) TMI 18 - MADRAS HIGH COURT as affirmed by SC 1997 (12) TMI 106 - SC ORDER weighed in the mind of CIT(A) is in different factual backdrop with real difference. In that case, the assessee was entitled to use the benefit flowing from license even after the termination of license agreement. This feature is the dividing line for inapplicability of decision in Southern Switchgear. Hence, there is no scope of treating the royalty paid for the 'licensed information' as capital expenditure in the facts of the case. Appeal of assessee allowed.

Summary

Issues:
Challenge of disallowance of expenditure as capital expenditure.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of expenditure amounting to a specific sum as capital expenditure related to royalty payment for technical know-how and technical process. The Assessing Officer disallowed 25% of the royalty expenses as capital expenditure but allowed depreciation on such expenditure. The CIT(A) affirmed the disallowance. The main issue was whether the payment towards technical know-how should be considered capital or revenue expenditure.

The assessee argued that the license agreement did not involve the transfer of ownership of technical know-how and the licensee had the right to use it only during the license period. The assessee contended that there were no long-term benefits accruing and the technical know-how was used to improve the existing business, not to set up a new one. The assessee also highlighted the confidentiality clause and the termination provisions of the agreement to support the claim that the expenditure should be considered revenue in nature.

The Revenue authorities, however, argued that the text of the license agreement implied a perpetual right to use the technical know-how, creating a long-term capital asset. They relied on the decision of the Hon'ble Supreme Court in a specific case to support their position.

After considering the submissions and the terms of the license agreement, the Tribunal found that the assessee had acquired only the right to use the technical know-how during the license period and could not sub-license it or use it after the agreement's termination. The Tribunal concluded that the expenditure should be treated as revenue expenditure, as the assessee had not acquired any enduring benefit or capital asset. The Tribunal distinguished the cited Supreme Court decision based on the specific facts of the case. Therefore, the appeal of the assessee was allowed, and the entire royalty expenditure was considered as revenue expenditure.

In conclusion, the Tribunal held that the payment for technical know-how should be treated as revenue expenditure, as the assessee had not acquired any capital asset or enduring benefit from the license agreement. The decision was based on the specific terms of the agreement and the absence of any long-term benefits accruing to the assessee.