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TMI Blog2015 (5) TMI 584X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : Shri Pavan Kumar Beerla ORDER Per B.R.BASKARAN, Accountant Member: The assessee has filed this appeal challenging the assessment order dated 12.3.2013 passed by the assessing officer u/s 143(3) r.w.s. 144C(1) of the Act in conformity with the directions issued by the Dispute Resolution Panel (DRP). The assessee is aggrieved by the decision of the AO/DRP in holding that the royalty paid by the assessee is capital in nature. 2. The facts in brief relating to the above said issue are that the assessee is engaged in the business of insulation processing of Pipes used in Oil and gas industry. During the year under consideration it obtained a contract from M/s Jindal Saw Works Limited, Kutch, Gujarat for insulation process of pipes for Barmet-Salaya Pipe line project. For carrying out this contract, the assessee entered into an agreement with M/s Perma Pipe Middle East FZC (herein after PPME ) for acquiring necessary technology. As per the agreement, the assessee was required to pay a lump sum for technology transfer and further a royalty of 5% of the gross revenue received from the contract. The assessee capitalised the technology transfer fee, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee as also royalty payment in consideration for the use of the said technology and provision of the related process and technical know-how on an ongoing basis during the execution of the project. The Licensee shall pay he Licensor a lump sum technology transfer fee amounting to USD 2 million which shall become due and payable as detailed below: a) 12.50% on the last day of the month in which the midpoint of the project is achieved b) 87.50% on the last day of the month in which the three quarter point of the project is achieved The royalty payments for supply of technical know-how during the course of the project shall be computed at the rate of 5% of domestic revenue invoiced, based on the guidelines prescribed by the Ministry of Commerce and Industry, Government of India, Such royalty relating to the project shall be computed on the basis of the total revenue involved by the Licensee from the commencement of the project but shall become due and payable only on the last day of the month in which the three quarter point of the project has been achieved ARTICLE 8: DURATION The agreement shall remain in force till December 31, 2009 from the date hereof. Af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut Mechanical/Machine design Chemical Plumbing Design HVAC Design Electrical Panels Design Controls and Automation Design Electrical Distribution System Design Determination of Electrical Load Requirements Material Storage and Handling Systems Analysis and Design Low Voltage Systems Design QA Lab Design Procurement Assistance in sourcing and procurement of all machinery required for process output of pipe up to 3 km /day of 90 mm polyurenthane and 5 mm of HDPE jacketing and suitable for the processing of no less that 600 km. Advice in sourcing and procurement of a prototype foam machine and for conducting all foaming tests prior to purchase at vendor facility. Providing technical parameters to quality equipment and manufactures Testing Review and evaluation of the training procedures to train and test the responsibility of PIPL personnel Provide off-site support of technical assistance and routing assistance for machinery testing Review and evaluation of acceptance tests run at manufacturing facilities of the third party machinery supplier outside India prior to shipment. Commissioning Providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Designing for any project c) Submtal of Presentation to customers d) Presentation to prospective customers e) Marketing Material 4. Adverting our attention to the above said clauses, the Ld A.R submitted that the entire agreement is only for a short period only, i.e., for the period from 1.7.2008 to 31.12.2009 and the same is extendable by another six months, meaning thereby, the agreement is valid at the maximum for a period of two years only. He further submitted that the ownership of technology remained with Licensor, i.e., PPME and not with the assessee. Further as per Article 5, the assessee is required to maintain confidentiality of the technology and other information provided by the PPME. As per article 11, all the information, data and other material have to be returned back to PPME on termination of the agreement. Accordingly, the Ld A.R contended that the technology transfer fee also is required to be allowed as revenue expenditure, but the assessee has capitalised the same for a safer course. He further submitted that the royalty payment is made by the assessee towards plant operation, system and procedures development and the same is intended to ensure qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. The assessee was not to disclose to third parties any of the documents made available to the assessee without having received a written authorization from the foreign collaborator. The Tribunal held that the amount paid by the assessee under the agreement constituted revenue expenditure. The High Court concluded that the features of agreement clearly established that what was obtained by the assessee was only a licence and what was paid by the assessee to the foreign collaborator was only a licence fee and not the price for acquisition of any capital asset and, therefore, the Tribunal was right in treating the amount as revenue expenditure. On appeal to the Supreme Court The reasoning and conclusion of the High Court were unassailable. The High Court rightly held that the expenditure incurred in the instant case by the assessee was only a revenue expenditure. The instant appeal failed and were dismissed. 8. In view of the above, we set aside the order of AO/DRP on this issue and direct the AO to allow the royalty payment as revenue expenditure. 9. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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