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TMI Blog2020 (11) TMI 951X X X X Extracts X X X X X X X X Extracts X X X X ..... achi licence products within the territory using technical know-how furnished by Hitachi and to sell otherwise dispose of the Hitachi licence products. The products shall be sold only under the trade / brand name of Tata Hitachi - even expiry of the 11 years from the date of commercial production, the assessee is entitled to continue the manufacture and sale of Hitachi licence products for the aforesaid term of the agreement. Under the agreement, the assessee has incurred an expenditure which gives him enduring benefit, therefore, the same has to be treated as capital expenditure. AO as well as the tribunal rightly held that payment of royalty made by the assessee is a capital expenditure and is not a permissible deduction under Section 37(1) - Decided against the assessee. - I.T.A. NO.101 OF 2016 - - - Dated:- 20-11-2020 - HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T. NARENDRA PRASAD APPELLANT (BY SMT. JINITHA CHATTERJEE, ADV., FOR SRI. S. PARTHASARATHI, ADV.,) RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) JUDGMENT ALOK ARADHE J., This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was required to be paid in respect of each of new Hitachi licence products sold by the assessee for a period of 7 years from the date of commencement of commercial production or ten years from the execution of the agreement, whichever is earlier. The Assessing Officer by an order dated 30.12.2011 inter alia concluded that the payment was made for acquiring a right, which provided enduring benefit and held that the same was a capital expenditure, which creates acquisition of right in the use of technical know-how and grant of rights for manufacture of licence, which include intellectual property. Accordingly, the claim of deduction under Section 37(1) of the Act was disallowed. 4. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 14.02.2014 inter alia held that the very fact that royalty payment is a percentage of sales clarifies that the nature of expenses is revenue as the link to the actual sales, which determines the quantum of payment. It was also held that the assessee under no circumstances would be in a position to transfer the rights. Thus, the Commissioner of Income Tax (Appeals) held that the assessee is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider the expenditure as capital expenditure. In support of aforesaid submissions, reliance has been placed on the decisions in 'CIT VS. CIBA OF INDIA LTD.', 69 ITR 692, CIT VS. I.A.E.C. (PUMPS) LTD', 232 ITR 316, 'PCIT VS. WESTERN AGRI SEEDS LTD', 'CIT VS. J.K.SYNTHETICS LTD.', 309 ITR 371, 'CLIMATE SYSTEMS INDIA LTD. VS. CIT', 319 ITR 113, 'CIT VS. ASHOKA MILLS LTD', 218 ITR 526, CIT VS. HERBALIFE INTERNATIONAL INDIA PVT. LTD.', ITA NO.3/2009 and 'CIT VS. LUWA INDIA LTD', 75 DTR 367. 7. On the other hand, learned counsel for the revenue submitted that the assessee came into existence by virtue of technical licence agreement and therefore, payment under the agreement is capital expenditure. In this connection, our attention has been invited to Clause (b) as well as Clauses 2.1 and 2.2 of the agreement. It is also pointed out that the know how remains with the assessee even after the expiry of the royalty period and there is no obligation under the agreement to return the same. It is argued that the amount of royalty paid by the assessee is capital expenditure and know how provided under the agreement is acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (b), Clause 1.13, 2.2, 2.4, 11.1, 15.2, and 24.1, which is reproduced below for the facility of reference: (b) Telcon is a Joint Venture of Hitachi and Tata Motors Limited (formerly known as Tata Engineering and Locomotive Company Limited and hereinafter referred to as Tata Motors ) and has been set up with the object of engaging in the manufacture, marketing and servicing of the Hitachi licence products and Telcon's products. 1.13 Technical Know-How shall mean product information, drawings, manufacturing procedure and methods, technical documentation and other technical information owned by or available with or to Hitachi, relating but not limited to manufacture, quality standards, functional tests, inspection and servicing of Hitachi Licence Products and shall include all intellectual property in relation thereto. 2.2 Subject o the terms and conditions of this agreement, Hitachi hereby grants to Teclcon, an exclusive but non-transferable licence, to manufacture and / or assemble the Hitachi Licence Products within the territory using technical know-how furnished by the Hitachi pursuant hereto and to sell or otherwise dispose of the Hitachi Licence Produ ..... 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