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TMI Blog2014 (12) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing adjustment amounting to Rs. 1,82,71,11,446/- in relation to the advertisement, marketing and sales promotion (AMP) expenses. Here, it is pertinent to mention that a Special Bench was constituted on this issue in this very appeal. An order dated 23.1.2013 has since been passed by the Special Bench as LG Electronics Pvt. Ltd. Vs ACIT (2013) 140 ITD 41 (Del) (SB). Two questions were referred to the Special Bench. The first question has been answered by holding that the transfer pricing adjustment in relation to the AMP expenses incurred by the assessee for creating or improving the marketing intangibles for and on behalf of its foreign associated enterprises, is permissible. The second question as to whether the assessee should have earned a mark-up from its AE in respect of such AMP expenses incurred for and on behalf of the AE, has also been answered by eventually restoring the matter to the file of TPO for de novo adjudication in the light of certain guidelines outlined in the order. Now, this Division Bench is bound by the Special bench decision and cannot tinker or amend the conclusions so drawn, as was argued by the ld. AR in an attempt to persuade us for re-dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears, as against the perpetual license taken by the assessee. Considering the fact that the assessee separately paid for Design and development and that the license was perpetual, he discounted the uncontrolled royalty rate by 2%, thereby calculating the arm's length royalty rate at 1.5%. Since the assessee paid royalty @ 5%, he proposed an adjustment of 3.5%, translating into an addition to the tune of Rs. 76,50,88,800/-. The assessee challenged the draft order prepared on the basis of the TPO's order, before the Dispute Resolution Panel (DRP). The DRP, vide its direction dated 27.9.11, partly agreed with the assessee's contentions. It was held that the TPO ought to have considered some other companies also as comparable which were dealing in the same product as selected by the TPO, viz., Colour television. Two companies, namely, Kenwood Design Corporation (Licensor) and Videocon International Ltd. (Licensee) with 5% royalty rate and Victor Company of Japan (Licensor) and Mirc Electronics Ltd. (Licensee) with 5% royalty, were also held to be comparable. Thus, three companies in total, including the one which was selected by the TPO, were shortlisted by the DRP. It was, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 391 onwards of the paper book, was signed, effective from 1.1.2003, providing that the Royalty shall be charged at 3%, being the same rate as per terms and conditions of the Press Note No.9 (2000 series) dated 8.9.2000. Another Addendum dated 20th January, 2004 was entered into w.e.f. 1.1.2004, a copy of which is available on page 395 onwards of the paper book, increasing the rate of royalty to 5%, in conformity with the RBI Instruction and also adding Refrigerators to the existing range of Products. One more Addendum dated 3.1.2005 was executed effective from 1.1.2005 stipulating the same rate of royalty of 5%, but with payment on quarterly basis as against the earlier annual payments. Still another Addendum dated 14.1.2006 was signed w.e.f. 1.1.2006, a copy of which is available on page 401 onwards of the paper book, providing for the payment of royalty @ 5% as permissible by the RBI Circular. By this Addendum, the range of products to be manufactured by the assessee increased to five with the further addition of Microwave. That is how, the assessee paid royalty @ 5% to LG Electronics Inc. for the period relevant to the assessment year under consideration. As against the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method as may be prescribed by the Board', is not relevant to the year under consideration as it has been prescribed under Rule 10AB by the Income-tax (Sixth Amendment) Rule, 2012, with retrospective effect from 1.4.2012 applicable from assessment year 2012-13. Rule 10B provides mechanism for determination of ALP under the five methods. Sub-rule (1) of Rule 10B provides that : 'For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method......'. A brief reference to the above provisions divulges that the transfer pricing legislation contemplates determination of arm's length price of an international transaction, which means for each transaction separately. The term 'transaction' has been defined in Rule 10A(d) to mean 'a number of closely linked transactions.' A conjoint reading of the provisions discussed above along with Rule 10A(d) makes it amply clear that the ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then, such closely link ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from an international transaction, which should to be taken into consideration for computing the total income. It does not mean that the actual more income from one international transaction vis-a-vis its ALP income should be combined with another transaction which gives actual income less than the ALP income and then both be processed together under this Chapter so as to set off the income (Transacted income minus ALP income) from the first transaction with the potential income arising from the second transaction (ALP income minus transacted value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That is the reason for which the legislature has provided for determining the ALP of each international transaction separate from the others. As the international transaction of royalty payment is a separate transaction and not closely linked with the other transactions with w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Del) and Coca Cola Inc. VS. Asstt. CIT (2009) 309 ITR 194 (P&H) and certain Tribunal orders. 8.2. We have heard the rival submissions on this aspect of the matter in the light of various decisions cited at the bar. There is no dispute on the fact that certain benches of the Tribunal have held that the rate of royalty as approved by the Government of India/Reserve Bank of India should be considered at arm's length price, whereas other benches have not affirmed such a view. Some of the decisions holding in favour of the assessee are as under :- (i) Abhishek Auto Industries Ltd. Vs. CIT (ITA No.1433/Del/2009) (ii) Sona Okegawa Precision Forgings Ltd. Vs. Addl.CIT (ITA No.4781/Del/2010) (iii) SGS India Pvt. Ltd. Vs. ACIT (ITA No.2406/Mum/2006). 8.3. On the contrary, some of the decisions which have not approved this line of thinking that the rate of royalty as allowed by the Government of India/Reserve Bank of India should be construed as a arm's length rate, are as under :- (i) Serdia Pharmaceuticals (India) (P) Ltd. Vs. ACIT (ITA No.2469/Mum/2006). (ii) Perot Systems TSI (India) Ltd. Vs. JCIT (ITA No.2320-2322/Del/2008). (iii) Skol Breweries Ltd. Vs. ACIT (ITA No. 6175/Mum/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow any excessive and unreasonable payment made to the closely related persons as referred to in clause (b) of section 40A(2). Similarly, the purpose of Chapter-X of the Act is also to ensure that income from international transactions is computed having regard to the arm's length price. In this way, any excess payment made to associated enterprises in an international transaction is recomputed to bring it in line with what an independent party would charge from another unrelated party. The essence of both the provisions is same in so far as the payment for expense to related parties is concerned. 8.6. Now we take up the decision in the case of Coca Cola (supra). The assessee in that case filed a writ petition requesting to quash the notices issued under ss. 148 and 92CA(3) of the Act. The Hon'ble Punjab & Haryana High Court framed four questions for consideration and decision, inter alia, question no. (iii) reading as under :- "(iii) Whether provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in absence of allegation of transfer of profits out of India or evasion of tax?" 8.7. All the four questions were decided against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned judgment. 3. Accordingly, the special leave petition stands disposed of. Stay order granted by this Court stands vacated.' 8.9. It can be seen from the observations of the Hon'ble Supreme Court that nowhere the view of the Hon'ble High Court has been reversed as contended by the ld. AR. The Hon'ble Supreme Court has simply held that in the absence of the foundational facts, the writ petition could not have been disposed of. Accordingly, the assessee was relegated to the proceedings before the authorities as per law. It was further made clear that 'the authorities will decide the matter uninfluenced by any of the observations made in the impugned judgment.' The material fact to be noted is that the Hon'ble Supreme Court did not vacate the principles laid down by the Hon'ble High Court on merits, but simply held that in the absence of factual position concerning that case in writ petition, the authorities under the Act were to decide the proceedings independent of such principles. In so far as the legal principles articulated by the Hon'ble High Court, including the applicability of the Transfer Pricing provisions even on the transactions which have been approved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing analysis is to find out a comparable case engaged in the same line of business. The rate of royalty for use of technical know-how of industrial equipments cannot be considered as comparable with that of electronic goods. Even within the overall electronic goods segment, there can be different products or components and the technical know-how required for components cannot be compared with the electronic goods on the whole. In our considered opinion, at best, the rate of royalty approved by the RBI has a persuasive value in the process of determination of ALP of Royalty for a particular case and cannot be considered as conclusive. 8.13. It is relevant to mention that the ld. AR initially argued and also submitted Synopsis in support of the contention, that if the payment of royalty has been made as per the rate approved by the RBI, then no further benchmarking is required and the question of determination of ALP should be deemed as set to rest. However, in the rejoinder, he fairly conceded and rightly so, that such approval has only a persuasive value and is not conclusive. The contrary contention initially advanced on behalf of the assessee in this regard is, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons given above, this case also cannot be considered as comparable. Ergo, we uphold the exclusion of this case also from the list of comparables. 9.4. The next case is SRS Labs Inc. (licensor) and Salora International Ltd. (licensee). This company made payment for technical know-how fees for manufacture of 'Speaker'. Obviously, the technical know-how for manufacturing of Speaker cannot be functionally compared with the know-how for manufacturing of AC, Refrigerator and Washing machine etc. Thus, this company is also held to have been rightly excluded. 9.5. The last case is Vilter Manufacturing Corporation (licensor) and Frick India Ltd. (licensee). In this case, payment of royalty was made for obtaining technical know-how for the manufacture of 'Refrigeration compressors.' There is hardly any need to accentuate that refrigeration compressors, being a component of refrigerator, cannot be compared with refrigerator as such. We, therefore, hold that the authorities below were right in excluding this company also from the list of comparables. 9.6. The other three cases which find mention in the list of comparables have paid royalty for obtaining technical know-how for the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the AO to include only three companies in the list of comparables to the exclusion of other companies. The contention raised on behalf of the assessee for expanding the list of comparables, therefore, fails. IV. Deduction for perpetual agreement : 10.1. The ld. AR argued that the DRP was not justified in directing to reduce the average rate of royalty of comparable companies (having a fixed term royalty agreements) by 1% on account of assessee's perpetual royalty agreement with LG Electronics Inc. The ld. AR contended that although there was no fixed term prescribed for licensing of technical know-how in the agreement between the assessee and LG Electronics Inc. and was thus perpetual, yet it provided for its termination in certain circumstances. It was submitted that the fixed tenure of the agreements for supply of know-how of three comparable companies chosen by the authorities below ranged from 5 to 7 years. He stated that instead of reducing the average rate of royalty by 1%, there should have been enhancement of 1% because a person with a perpetual agreement is always in a disadvantageous position because of the fear of obsolescence of technology. The ld. DR opposed such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how, it was argued that the royalty paid was not only for the Technical Assistance as provided at the time of entering in to the Agreement, but also for the future models of the products. This shows that the Licensor is bound to provide upgraded know-how of the products from time to time and it is not the case that whatever know-how was provided at the time of entering into agreement, shall continue forever. This position belies the contention of the ld. AR about the obsolescence of technology calling for upward adjustment in the profit rate of comparables. 10.3. At this stage, it is significant to mention that the perpetual agreement between the assessee and LG Electronics Inc. is not subject to a fixed rate of royalty. With every increase allowed by the Government of India, the assessee and its AE have revised upwards the rate of royalty starting with 1% and going upto 5%. It can be seen that the review of the rate of royalty clause has been stipulated in the Agreement dated 1st July, 2001. Article 4.1 (a) with the caption 'Review of the Royalty' provides that 'The parties agree to review and re-negotiate the rate of Royalty, Technical Assistance Fees, if required, within 90 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fixed term is entered into, the possibility of nonutilization of the technical know-how during interregnum, being from the termination of the first agreement till the entering into of a new agreement, cannot be ruled out. It is but natural to factor the effect of such temporary lull in the rate of royalty to be charged as per the commercial realities, so as to set off the possible loss due to temporary non-user of technical information after the termination of the agreement. This tends to increase the rate of royalty in a case of fixed term license. As there can be no such possibility of non-user of technical know-how in the case of an agreement with perpetuity, other things being equal, the rate of royalty in a perpetual agreement is bound to be low. 10.6. In an earlier para, we have upheld the application of CUP as the most appropriate method for the determination of ALP of the international transaction of Royalty payment. Rule 10B(1)(a) of the I.T. Rules, deals with the computation of arm's length price under the CUP method. Sub-clause (i) provides that the price charged or paid in a comparable uncontrolled transaction or a number of such transactions is identified. Sub-claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenant for a long-term may compromise some amount of rent, in comparison with a landlord finding a tenant requiring the premises for a short-term. The rate of rent in a former case will be lower for a variety of reasons, such as, not undergoing the process of finding a tenant every now and then, fear of the property remaining vacant for some time after the exit of the first tenant and incurring costs at the time of each let out. Difference between the rent charged by the landlord or paid by the tenants in the afore discussed two situations is nothing but a discount allowed to a tenant of longterm on the available market rate of rent. This analogy can be applied to the present facts by considering the discount which a licensor with a perpetual license may allow or the premium which a licensor with a fixed term license may charge. It can be seen that the TPO downgraded 2% on this score and reduced the unadjusted comparable rate of 3.5% to the adjusted 1.5%. To put it differently, the TPO treated the premium charged by the comparable licensors on account of fixed term licenses at 57% (2/ 3.5*100), or in other words, the discount at such rate to the prevalent market rate on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier year, and there is no change in the facts or law, then the view so taken should not be departed from in the succeeding year. If, however, due to some mistaken belief, the AO has decided an issue wrongly in an earlier year, then the mistake so committed must not be allowed to perpetuate. It should be corrected so as to make the final assessment in accordance with the correct rule of law. The hands of the AO cannot be tied so as to make him functus officio by sticking to such a wrong view in later year as well, even after having realized the mistake committed in earlier year. As a mistake committed by the AO in wrongly deciding an issue against the assessee in an earlier year can be corrected by deciding it in accordance with law in assessee's favour in a succeeding year, similarly a mistake committed by the AO in wrongly deciding an issue in favour of the assessee in an earlier year can be equally checked by deciding it correctly against the assessee in a succeeding year. The crux of the matter is that the law should take its own course and the assessment should be made strictly in conformity with the provisions of the Act. If a particular issue was wrongly decided in an earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM on entity level. This contention is, therefore, repelled. 12. We sum up our decision on this issue by holding that the arm's length rate of royalty be taken at 4.05% and the addition on account of transfer pricing adjustment of royalty payment at 5% be made accordingly. The impugned order is modified pro tanto. 13.1. Ground no. 5 of appeal is against the addition towards transfer pricing adjustment amounting to Rs. 11,11,67,130/- on account of international transaction of payment of 'Export commission'. Ground no. 11 is also connected with the ground no. 5, by which the action of the AO has been challenged in treating the amount of Rs. 11.11 crore as diversion of profits to LG Korea and thus a non genuine business expenditure. Briefly stated, the facts apropos this issue are that the assessee paid commission of Rs. 11.11 crore to LG Korea for exports of Colour TVs. The TPO observed that the commission was paid to assessee's AE in Korea for exports made to other countries. On being called upon to furnish the details of services rendered by its AE to promote the assessee's sales outside India, the assessee stated that its AE provided marketing support through its network all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitive customers outside India and, hence, did not need much support for promotion of its export sales. It was not shown as to how the commission rate of 4.5% of the sales represented the arm's length rate. The assessee's contention that the benchmarking of this transaction was rightly done under TNMM on consolidated basis was also rejected in view of the DRP noticing several Tribunal decisions holding that transaction by transaction approach was to be followed for determining the ALP of international transactions. Since the payment of commission is a separate class of transaction, the DRP opined that the same ought to have been benchmarked separately from the rest of the international transactions. In the absence of any evidence for rendering of actual services by its AE, the DRP came to hold that the ALP of this transaction was rightly taken at Nil. The assessee is aggrieved against the addition made by the AO pursuant to the DRP's direction. 13.3. We have heard the rival submissions and perused the relevant material on record. The claim of the assessee is that LG Korea rendered numerous services for which commission was paid at the rate of 4.5%. It is just basic that a deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the ITO. It came to the conclusion that the so-called selling agency agreement between the assessee-firm and the selling agency firm was only a make-believe arrangement. It was merely a device to minimize the tax liability of the assessee-firm and it was not a genuine business arrangement. When the matter finally reached the Hon'ble Apex Court, the view taken by the Tribunal was affirmed by holding that the mere existence of an agreement between the assessee and its sole selling agents or payment of certain amounts as commission, assuming there was such payment, did not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it was still open to the ITO to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under s. 37 of the Act.' Considering the ratio of this judgment, we find no hesitation in holding that the AO was fully justified in holding on page 29 of the assessment order that : 'For a commission paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned, we find that there is no service which is to be provided by the LG Korea in lieu of commission. It is so for the reason that only if the requisite materials cannot be procured by the assessee that LG Korea shall supply the same on 'sale basis'. Supplying the raw material, etc., to the assessee 'on sale basis' by LG Korea cannot be equated with rendering of services for earning commission, because the sale price will naturally have the element of profit to compensate for the effort in making sale. In a nutshell, the Agreement between the assessee and LG Korea mandating a commission payment @ 4.5% on sale of Colour TVs is simply for procuring orders by LG Korea on behalf of the assessee, which is covered under clause 1 of Article 4. Having seen the nature of services to be rendered by LG Korea as per the Agreement, we find that there is a great mismatch between the assessee making a huge claim of several activities done by LG Korea, as summarized in an earlier para with sr. nos. i. to vi., as quid pro quo for 4.5% commission. It is further significant to note that the assessee stated before the DRP that export commission was paid to LG Korea in respect of export of Colou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it as undisputed that the export of Colour TVs increased by 10%, but the fact which merits notice is that there is an all around increase in the exports of all the products of the assessee, for which no commission was paid. It can be seen that there is an overall increase of 52% (307 crore /586 crore *100) in total exports for the year over the preceding year. Notwithstanding 10% increase in exports of Colour TVs, we find that there is an increase of 65% (83 crore/ 127 crore *100) in the export of Refrigerators, 10.5% (1.50 crore / 14.28 crore *100) in the export of PCs and 51% (3.64 crore / 7.04 crore *100) in the export of Monitors. We fail to appreciate the contention of the assesse that the efforts put in by LG Korea led to 10% increase in exports of CTVs, when this fact is seen in juxtaposition to the overall increase in the exports by 52% on entity level and much higher increase in export of Refrigerators (65%) and Monitors (51%), for which no commission was paid at all. 13.8. Another significant factor, which needs to be considered is that the assessee entered into agreement with LG Korea for paying commission @ 4.5% w.e.f. 1st January, 2005 and prior to that also, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no such case of upbringing of the Indian entity till it was in red of its financial health. 13.10. The contention of the ld. AR that the DRP in the succeeding year has accepted that the assessee did not have any infrastructure abroad to make exports and hence the same be accepted for the instant year as well, is not acceptable. We find that there is contrary evidence galore. The assessee not only exported Products, other than CTVs, to foreign destinations without paying any commission during the instant year, but was also regularly exporting CTVs prior to the entering of the instant Agreement for commission. How the assessee could effect exports without having any infrastructure, is beyond our comprehension. 13.11. A bald contention that because of the efforts put in by LG Korea, the assessee's export of Colour TVs registered an increase by 10%, cannot be accepted unless such increase in exports is linked with the positive services rendered by the LG Korea, which link is miserably missing here. Be that as it may, we find that there is no special increase in export of CTVs because of the alleged services rendered by LG Korea. What is relevant to note is that, there is rather ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP at nil. 13.16. In so far as the first objection about the application of TNMM on entity level in demonstrating the transaction of commission at ALP along with several other international transactions on a combined basis is concerned, we have elaborately discussed and rejected such contention while deciding the earlier ground about the payment of royalty. The same reasoning is adopted to hold that the international transaction of commission payment is not closely linked with the other international transactions of import and export etc. and, hence, the same is required to be separately benchmarked. This argument of the ld. AR is, therefore, repelled. 13.17. As regards the other contention about the Revenue stepping into the shoes of the assessee for deciding as to whether the commercial decision of paying commission should have been taken or not, we find that the extant position is quite different. There is a remarkable difference in a situation in which the Revenue challenges the commercial decision of an assessee in availing a particular service and, a situation in which the authority to take the commercial decision is not challenged but the factum of the assessee having n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l assessment order dated 31.10.2011, inter alia, held that the claim of the assessee that payment of commission by it to LG Korea was made for promoting CTVs abroad could 'not be accepted as a genuine business expenses' and the same was a 'diversion of income by assessee to its holding company in garb of export commission' as provision of services by LG Korea to the assessee was not established. That is how, the AO disallowed the amount. Thereafter, the AO held that since the TPO has also made an adjustment of Rs. 11.11 crore in the ALP of this transaction, no separate addition was called for. 13.20. Applying the ratio decidendi of Cushman and Wakefield India Pvt. Ltd. (supra) to the facts of the instant case, we find that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. Thus, whereas the TPO did not decide this issue in conformity with the judgment in Cushman (supra), the AO rightly did his part of the job. Going by this judgment, even if the TPO had determined ALP of the transaction of commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer in his final assessment order came to hold that such royalty was paid for the services pertaining to enduring nature of products involving technical information. He treated it as a capital expenditure and accordingly made addition for Rs. 81.98 crore. The assessee is aggrieved against this addition. 16.1. We have heard the rival submissions and perused the relevant material on record. In order to decide as to whether the royalty paid by the assessee is of a capital or revenue nature, it is appropriate to see the relevant clauses of the Agreement dated 01.07.2001, pursuant to which such royalty was paid. The preamble part of the Agreement states that the Licensor allows 'use of' Technical Information and Industrial Property Rights for the manufacture, production and sale of the products. Article 1 of the Agreement defines 'Technical Information' to mean all the technical knowledge, knowhow, process, specification, lay outs, designs, drawings, and qualities standards, standards calculation, data and information developed or otherwise generally used by the licensor pertaining to the manufacture, production, assembly, use and sale of the agreed products. Article 2 of the Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he termination clause provides that upon termination, all the respective rights and obligation of the parties, namely, the use of technical knowhow and IPRS, shall cease. In other words, the assessee will not be entitled to use this technical know-how or IPRS after the termination of the agreement. Now the moot question which arises is as to whether the royalty paid for the use of technical knowhow and IPRS in the given circumstances be held as a capital expenditure as has been held by the AO or revenue expenditure as claimed by the assessee. 16.2. The Hon'ble Supreme Court in CIT Vs Ciba of India Ltd. (1968) 69 ITR 692 (SC) considered a situation in which that assessee was enabled to acquire the right to draw for the purpose of carrying on its business as a manufacturer and dealer of permissible products upon the technical knowledge available from the foreign company for a limited period with stipulation not to divulge the information to third parties and further return such information on the conclusion of agreement with the prohibition of not using the same after termination of the agreement. The payment made for this purpose was eventually held to be an admissible revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of knowledge which was of enduring nature and hence a capital expenditure. 16.4. An analysis of the above judgments rendered by the Hon'ble Summit Court clearly brings out that whereas the payment made for acquisition of technical know-how etc. on ownership basis is a capital expenditure, the payment made for use of such technical know-how is a revenue expenditure. A divider in the capital and revenue expenditure in the circumstances as are presently prevailing can be placed by ascertaining the correct nature of the right vested in the licensee. If licensee is allowed not only the simplictor use of technical know-how, but such use is coupled with the divesting of ownership in favour of the user, then it can be considered as a case of capital expenditure. If on the other hand, the licensee is allowed a simple use without anything else, then it can be only a revenue expenditure. The mere fact that the expenditure is resulting into bestowing a benefit of enduring nature in the shape of user of technical know-how, with whose assistance the assessee is carrying on its main activity of business, cannot be the sole determinative test of the nature of expenditure. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of royalty payment. 16.6. When we come back to the facts of the instant case it is observed that the factors which weigh in favour of the assessee are that the license was given on non-transferable basis; there is a confidentiality clause prohibiting the assessee from divulging the relevant information during continuation of the agreement or any time thereafter; on the termination of the agreement, respective rights or obligations under the agreement shall cease; and there is no power with the assessee to sub-license. On the other hand, the factors which weigh against the assessee are that the license is exclusively granted to the assessee; and the license is not for a limited period but perpetual. On considering the cumulative effect of all the factors, both for and against the assessee, we have no hesitation in holding such royalty payment to be of a revenue nature. The reason is ostensible, being the factors pointing towards revenue expenditure predominantly overshadowing the factors pointing against revenue expenditure. The factors which are against the assessee are albeit material, but stand outshined by the factors which are in favour of the assessee. It is a case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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