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TMI Blog2009 (11) TMI 935X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty. The AO after examining the relevant clauses of agreement relating to payments of royalty/technical know-how fee held that the assessee was deriving enduring benefit from the technology/information received. Accordingly, the AO capitalized the same and made addition under this head after allowing 25% depreciation to the assessee. The AO relied on the judgment in the cases of Commissioner of Income Tax Vs. Jacobs (P) Ltd., (1979) 120 ITR 197, Division Bench of Kerala High Court, Commissioner of Income Tax Vs. Polyformation (P) Ltd. (1986) 161 ITR 36 (Ker.), Commissioner of Income Tax Vs. Coal Shipments P. Ltd., (1971) 82 ITR 902 (SC) and held that the expenses incurred by way of royalty/technical fee were capital in nature and assessee was not entitled to deduction of the same as an item of revenue expenditure. Hence, capitalizing this expenditure, he allowed deduction of 25% of the amount, treating the same as technical know-how fee as defined in Section 32 of the Act. 2. The assessee preferred appeal against this order of the AO. In the appeal, the CIT(A) noted that the royalty/technical know-how fee was paid two parties, which required to be decided in different ways, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capitalized and not only 25%. It is the submission of the learned counsel for the Revenue that the Tribunal passed the order despite the fact that agreement between the assessee and M/s. Simelectro France was to remain in force for a long period of ten years. The agreement further provided that the assessee could file, with prior consent of the said company, an application with the Indian Patent Agency with respect to any new invention, patent and design without any financial obligation on the part of the assessee. Even after the expiry of the agreement, after the lapse of ten years, the assessee was still permitted to use technical information, improvements and patents, etc. free of charge for a period of ten years. It was clear that residuary benefit was available to the assessee for use of the technical know-how, patents, etc. free of charge and therefore, the entire royalty paid was in the nature of capital expenditure and the Tribunal could not have held that only 25% of this amount is to be capitalized and 75% is to be treated as revenue expenditure. 4. The learned counsel for the respondent, on the other hand, supported the reasoning given in the order of the Tribunal an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the obligations contained in clauses 6(e) and 6(d) and 25 of this agreement throughout the period of ten years commencing upon the termination of this agreement but in all other respect, S.S. shall have the right to use and to continue to use all information, methods, process and formulae acquired in pursuance of this agreement so far as the same shall not relate to patents or similar rights owned or controlled by BRUSH in India. Provided always that this right shall not apply in the event of this Agreement being terminated by BRUSH pursuant to either clause 22 or clause 24 hereof. 7. The clauses of agreement were thus almost similar. After taking note of the aforesaid agreement, the Madras High Court found that the benefit secured by the assessee was of an enduring nature and therefore, the entire technical fee could not be allowed as a revenue expenditure. Discussion on this aspect is in the following terms: A perusal of the above clauses clearly indicates that the technical knowledge the assessee-company obtained through this agreement from the foreign company secured to the assessee an enduring advantage and benefit in that the same was available to the assessee for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coming to the second issue as to whether the Tribunal is right in upholding the disallowance of 25% of the royalty paid, the ITO, the appellate authority as well as the Tribunal have all concurrently held that the disallowance of 25% of the royalty is justified. Under the terms of the know-how agreement, the royalty is payable on all switchgear products and the parts thereof sold on behalf of the Indian company at the rate of 2 % of the invoice value of all low tension switchgear products at 5% in all the high tension switchgear parts and a royalty of 7% in all switchgear products exported. Thus, it is seen that the assessee paid a royalty for the acquisition of an exclusive privilege of manufacturing and selling the products. The acquisition of such a right has rightly been treated partly towards capital and partly towards the revenue. The Tribunal has chosen to estimate the value of that portion of the royalty which is relatable to acquisition of right of an enduring nature. In this view, the Tribunal is right in holding that 25% of the royalty is to be disallowed. 9. The Supreme Court in Southern Switch Gear Ltd. Vs. Commissioner of Income Tax, 232 ITR 359 upheld the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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