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TMI Blog2009 (10) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the extent of royalty to be paid and it will decrease or increase every year depending upon the decrease or increase in the sales. Significantly, this payment is not because of “transfer” of technology, but for providing “technical services”. In such circumstance, we are of the opinion that this payment of royalty, which is a continuous process, should have been treated as revenue expenditure - 464 of 2009 - - - Dated:- 9-10-2009 - A. K. SI KRI and VALM IKI J. MEHTA JJ. Dr. Rakesh Gupta with Ms. Aarti Saini for the applicant. Ms. Prem Lata Bansal for the respondent. JUDGMENT The judgment of the court was delivered by 1. A. K. SI KRI J. —The applicant-company (hereinafter referred to as "the assessee"), enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him, the expenditure was of capital nature. This order of the Assessing Officer has been confirmed by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). Challenging the orders of the Tribunal, the present appeal is preferred, which was admitted on the following substantial question of law : "Whether the Income-tax Appellate Tribunal is right in law in holding the royalty expense as capital in nature?" 3. We find from the reading of the order of the Tribunal that the following aspects weighed with the Tribunal in forming the opinion that the payment in question represented capital expenditure: (i) As per article 6 of the agreement, even after termination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, viz., "transfer of CAB technology" and "providing technology and technical services". He also submitted that the agreement only granted non-exclusive rights and licence to the assessee for use of technical information and industrial property rights for manufacture, sell, repair and service and that there was no acquisition of technical information by the assessee. Moreover, after the expiry of the term of the agreement, all the industrial property rights made available to the assessee would cease and the assessee would be entitled to merely use the technical information for production. The learned counsel also drew our attention to the various clauses of the agreement in support of his aforesaid submissions. He argued that technical info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of enduring nature for the benefit of his business inasmuch as per article 6 of the agreement, even after termination of the agreement, the assessee could continue to use the technical information in production of the license products. He further, submitted that a finding of fact was arrived at in the present case that as per clause (1) (b) of article 4 of the agreement, the assessee had to pay royalty at 3 per cent. of domestic and at 5 per cent, of export sales in consideration of the obligation of providing technology and technical services. The term "technology and technical services" was defined in clause (2) (b) of article 1 of the agreement. On the interpretation of this clause, the Tribunal opined that the technical services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two parts. Cause (1) (a) of article 4 stipulates making payments of lump sum fee and reads as under: "(a) For transfer of CAB technology by licensor to licensee, licensee shall pay the licensor a lump sum of US$ one million (1,000,000) in three equal instalments." 7. Clause (1) (b) of article 4 deals with royalty payment (with which we are concerned) reads as under: "(b) In consideration of the obligations of providing technology services, the licensee shall pay a royalty of 3 per cent. on domestic and 5 per cent, on export sales, subject to tax, calculated on the basis of the net ex-factory sale price as stated in the licensee's invoice of all licensed product produced by or for the licensee, exclusive of excise duties minus the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Holding that, the said payment would be in the nature of revenue expenditure, this court dealt with the issue in the following manner (page 73): "3. In so far as lump sum payment against transfer of technical know-how provided by the Korean company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The Commissioner of Income-tax (Appeals) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler. 4. We are of the opinion that this finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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