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TMI Blog2013 (11) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to acceptability of royalty expenditure incurred towards the use of technical information provided by a foreign company to the assessee-company, is involved, so it would be convenient to decide them by a common order. 2. Briefly stated, the facts of the case are that the assessee-company is engaged in the business of manufacture and sale of automotive lighting equipments. The assessee had paid certain sum initially as royalty to M/s Koito Manufacturing Co.,(KMC), Japan, under an agreement entered into with them on 24.11.1995. The break-up of selling expenses showed (in all the years) that huge amounts have been debited towards royalty paid to KMC, Japan. The selling expenses are shown at Rs. 1,51,35,350/-, Rs. 2,41,33,099/- and Rs. 2,26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have found from the perusal of the agreement that KMC granted the assessee an exclusive right to manufacture and sell the products in India using the licenced technology provided. An exclusive right has been conferred on the assessee for manufacturing and selling the products in India. The payment of royalty towards technical information provided by a foreign company in respect of manufacturing methods of the products and the licence granted to the assessee-company to manufacture and sell the products was treated by the Assessing Officer as acquiring of an advantage of enduring nature and thus, held it to be a capital expenditure. On the other hand, the argument advanced by the ld.AR is that those expenses for acquisition of technical know- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een paying royalty @ 3.5% for products manufactured by using licenced technology supplied by KMC This royalty is paid @ 3.5% of net sales less imported components. As per this agreement, if there is no sales, no royalty is payable by the assessee. 5. We have gone through various Articles of this agreement which are incorporated in the appellate order for assessment year 2005-06 towards which our attention was also invited. The Assessing Officer has relied on the decision of Hon'ble Madras High Court rendered in the case of CIT vs Southern Switchgear, 148 ITR 272, affirmed by the Hon'ble Supreme Court in 232 ITR 359, to hold that the entire royalty paid has to be treated as capital. But we have noticed that the facts of this case are slight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, was transferred to Indian company and the technical know-how transferred was also for the setting up of the factory which are all in the capital field. In those circumstances, 25% of the payment had been held to be capital because only 25% of the initial lump sum and royalty payment was considered as capital. In the given case, no such property has been transferred to Indian Company nor is the technical data provided to set up the plant. Keeping in view the differential nuance of facts between the facts of assessee's case and other decisions of Hon'ble Madras High Court referred to above, out of which two have been affirmed by the Apex Courts whose facts are more akin to the facts of the given case, it would be just and prudent to appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the rate of 2.5% on domestic sales and at 5% on exports. The court was deciding whether such royalty payment would fall within the category of revenue expenditure or capital expenditure. The High Court has taken a view in favour of the assessee. The Chennai Bench, recently in the case of Nippo Batteries Co. Ltd vs ACIT, [2011] 7 ITR (Trib) 303 (Chennai) has decided similar issue by holding that such type of royalty payment cannot be bifurcated without any provision in the agreement and the entire payment has to be treated as revenue expenditure allowable as deduction. The Bench has discussed more than a dozen of decisions of various High Courts including that of the Hon'ble Madras, Delhi and Apex Court to arrive at its above conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct in question even after the expiry of the agreement it is justified in holding that 25% of the royalty, though paid on percentage of gross turnover, was capital expenditure. Ostensibly, the facts of this case are entirely distinguishable from the case in hand. Therefore, after considering the entire facts, circumstances and legal position, we hold that the expenses debited towards royalty payments in all these assessment years have to be treated as revenue payment in toto. Our above finding results in allowing the appeals of the assessee and dismissing the appeal of the Revenue. 7. In the result, the appeals of the assessee are allowed whereas the appeal of the Revenue is dismissed. Order pronounced in the open court on 10.6.2011. X X X X Extracts X X X X X X X X Extracts X X X X
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