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TMI Blog2016 (7) TMI 1608X X X X Extracts X X X X X X X X Extracts X X X X ..... n service of 30 days prior notice to the other party and that the initial tenure of the agreement is for ten years which is extendable for one year every year subject to the termination by notice by either of the parties. However, no where does the agreement mention that Patent/Trademark/Software copyright/know-how is being purchased by the licensee/assessee and that the assessee will have an unfettered right over the same. The ld. DR could not point out to any clause in the agreement which would suggest that there was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. [ 2008 (3) TMI 679 - DELHI HIGH COURT ], the assessee company entered into an agreement with M/s Stanley Electric Co. Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expenditure. The Assessing Officer disallowed the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Department against the order dated 30.08.2010 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2004-05 and challenges the deletion of addition on account of Royalty amounting to ₹ 1,33,83,745/-. CO 399/Del/2010 has been preferred by the assessee assailing the initiation of reassessment proceedings in AY 2004-05. 2. ITA No. 2798/Del/2012 has been preferred by the Department against the order dated 20.03.2012 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2007-08 and challenges the impugned order on three counts viz. (i) Deletion of addition of ₹ 2,42,09,240/- on account of Royalty; (ii) Deletion of addition of ₹ 18,423/- on account of extra depreciation claimed on UPS; (iii) Deletion of addition of ₹ 34,17,901/- on account of interest income. 3. ITA No. 5323/Del/2012 has also been preferred by the Department against the order dated 28.11.2011 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2008-09 and assails the action of the ld. CIT(Appeals) in deleting the addition of ₹ 1,08,60,681/- on account of Royalty. Since all the appeals had a common issue, they were heard together and they are being disposed of through this common order. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation claimed on UPS. 3. The ld. CIT (A) has erred on facts and in law in deleting the addition of ₹ 34,17,901/- on account of interest income. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal. Grounds of appeal (ITA No. 4785/D/2010): 1. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,33,83,745/- made on account of disallowance of royalty payment ignoring that payment of royalty was made for procuring and usage of 'trade mark' and 'technical know-how', which is clearly unambiguously an expenditure capital in nature. Further, it is a case, where it can be easily construed that he assessee company owned the 'trade mark' and 'technical know-how' "partly" along with its parent company for its operation for the period of ten years. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal. Grounds of CO No. 399/D/2010: 1. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,33,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation'. The Supreme Court further held that a particular outlay is capital or revenue. And, therefore, 'once for all' test as well as the test of 'enduring benefit' may not be conclusive. Consequently, the various items and conditions of the agreement, the advantages derived by an agreement, are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is a capital expenditure or a revenue expenditure. The Courts have applied different expenditure starting of a new business on the basis of technical know-how received from the foreign firm, exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payments made by the company to the foreign firm, whether a definite one or dependent upon certain contingencies, right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical information received from a foreign firm, payment whether made 'once for all' or in different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the ownership was never transferred to it at any stage. 8. On the issue of extra depreciation on UPS, it was submitted that UPS formed integral part of the computer system as the same was being used only with computers and not otherwise and hence depreciation was rightly allowable at 60% instead of 15% as allowed by the AO. On the issue of addition on account of interest income, the ld. AR submitted that in 2006, the company has lodged claims with Wockhardt Lifesciences Ltd (WLS) for non fulfillment of certain conditions specified in the Business Transfer Agreement (BTA). Pending settlement of such claims the company (assessee) has placed a deposit in Fifth Escrow Account of ₹ 8292600/- with the Citi Bank, escrow agent. Both the parties have filed their statement of claims account and the fixed deposit shall be en-cashed by the winning party as and when the case is decided in arbitration. This fact was declared by the appellant in the balance sheet. The interest accrued on the escrow account in the last four years and its declaration schedule per the following table - S.No. A.Y. Interest during the year Interest declared in the return TDS claimed during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. - 173 Taxman 390 (Delhi), the assessee company entered into an agreement with M/s Stanley Electric Co. Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expenditure. The Assessing Officer disallowed the claim holding that by virtue of the agreement, the assessee had derived an asset of enduring nature. On appeal, the CIT (A) allowed the assessee's claim holding that the expenditure incurred by the assessee was a recurring expenditure and not a capital expenditure. The Tribunal upheld the order of the CIT (A). On Revenue's appeal to the High Court, it was held as under:- "A perusal of the Circular No.21 of 1969, dated 9-7-1969 shows that if in terms of the agreement, only a license is required for user of technical kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see for a fixed amount and the payments would be made on the fulfillment of certain conditions. The agreement enabled the assessee to sub-license the technical knowhow to another Indian party subject to the prior written permission of 'R'. The validity of the agreement was for a period of five years, but it could be terminated before the expiry of that period in the event of any default by any of the parties. The agreement laid down that the right of the assessee to market any of the products manufactured under the agreement would cease upon its expiry or termination. Pursuant to the said agreement, the assessee paid certain amount to 'R' and claimed same as revenue expenditure. The lower authorities, relying on the word 'sold' in the agreement, held that it was a case of sale of technical know-how by 'R1 to the assessee and, therefore, payment in question could not be treated as revenue expenditure. However, the Tribunal held that there was no sale of technical knowhow by 'R' to the assessee and, therefore, the payment was revenue expenditure. It was held as under:- "There was, in fact, no absolute transfer of any right in the documentation given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the relevant year was a finding of fact rightly arrived at." 13. In the above mentioned case of Sharda Motors (supra), their Lordships discussed the earlier decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. J.K.Synthetics Limited - [2009] 309 ITR 371 (Delhi) wherein their Lordships have enumerated certain principles for determining whether the payment of royalty is a capital expenditure or revenue expenditure. The same is discussed at pages 111 & 112 of 319 ITR and is being reproduced herein below for ready reference:- "(v) expenditure incurred for grant of licence which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as : (a) the tenure of the licence, (b) the right, if any, in the licensee to create further rights in favour of Tribunal third parties, (c) the prohibition, if any, in parting with a confidential information received under the licence to third parties without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's books of account and a royalty of 3 per cent, of domestic sales and 5 per cent, of export sales to the US company for a period of 7 years for using the technology and for availing of technical services. During the previous year relevant to the assessment year 2002-03, the assessee paid to the foreign collaborators royalty calculated at 3 per cent, of domestic sales and at 5 per cent, of export sales and claimed deduction thereof as business expenditure. The Assessing Officer disallowed it as being of capital nature and this was confirmed by the Commissioner (Appeals) as did the ITAT on the grounds, inter alia, (a) that even after termination of the agreement the assessee could continue to use technical information in production of licensed products and hence the assessee obtained enduring benefit, and (b) that there was nothing to show that any technical service was to be provided on day-to-day or on regular basis at any specified interval and thus it was a case of outright transfer of technical know-how. On appeal, the Hon'ble Jurisdictional High Court held as under:- "Held, allowing the appeal, that under the agreement, payments were to be made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 16. In the assessee's case the Department has heavily relied upon the decisions of the Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra), for holding that the payment of royalty is capital expenditure but, the Assessing Officer has not fully applied that decision because in the case of Jonas Woodhead and Sons (India) Ltd. (supra) , only 25% of the royalty payment was held to be capital expenditure and 75% was allowed as revenue expenditure whereas in the present appeals the Assessing Officer has disallowed the entire payment as capital expenditure. We, therefore, respectfully following the above mentioned decisions of the Hon'ble Jurisdictional High Court hold that the annual payments of royalty were revenue expenditure. 17. Accordingly, ITA Nos. 4785/Del/2010 for AY 2004-05 and 5323/Del/2012 for AY 2008-09 filed by the Department are dismissed and Ground No. 1 in ITA No. 2798/Del/2012 (Department's Appeal) is also dismissed. 18. As far as ground no. 2 in ITA No. 2798/Del/2012 is concerned, the Department has challenged the deletion of addition of ₹ 18,243/- on account of depreciation claimed @ 60% on UPS. The ld. CIT (A) has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the AY 2009-10. The breakup of the interest pertaining to the AY 2006- 07, 2007-08, 2008-09 & 2009-10 credited by the bank in its account has been given by the appellant as noted above. Since the appellant did not have any right to claim the interest, it did not have any income accrued to it on account of interest in the Asst. Years preceding 2009-10. However, since the TDS was deducted on the interest credited by the bank, the appellant has taken credit on the same in the ITRs for the earlier Asst. Years. Since the appellant has declared the interest accrued for the entire period at ₹ 1,62,71,958/- in the AY 2009-10 when it got the right to interest income ,the action of the AO in assessing the interest credited by the bank at ₹ 34,17,901/- in the AY 2007-08 is not in order. Had the appellant not claimed TDS deducted by the bank in the respective assessment years, the TDS would have been lost. As per the appellant-for the Assessment Year 2008-09 the AO has not made any addition on this account. Therefore the addition made by the AO is deleted and the ground of appeal is allowed." 20. The ld. DR could not being any facts on record to dispute the findings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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