2010 (7) TMI 70 - HC - Income Tax

Revenue expenditure versus capital expenditure nature of payment of royalty - the assessee had obtained a licence from Nike company for sourcing marketing and sale of footwear and apparel of Nike brand in India. In accordance with the licence agreement which had been approved by RBI royalty @ 5% of domestic sale was paid for use of trademark Nike Held that - It is settled law that if expenditure brings into existence a capital asset or gives any advantage of enduring nature to an assessee it can be treated as capital expenditure. - both the CIT(A) and ITAT have concluded that royalty payable was related to the sales made during a particular year and accordingly the expenditure was of revenue nature. - as the assessee ceased to have any right to use technical information and/or trademark upon termination of agreement there was no advantage of enduring nature derived by the assessee from the said agreement - royalty fee is a revenue and not a capital expenditure.

Summary

Issues:
1. Condonation of delay in re-filing the appeal.
2. Challenge to the order of the Income Tax Appellate Tribunal (ITAT) regarding royalty payment.
3. Determination of whether royalty fees constitute revenue or capital expenditure.

Condonation of Delay:
The application for condonation of delay of 229 days in re-filing the appeal was granted by the court based on the reasons provided in the application. The delay was condoned, and the application was disposed of accordingly.

Challenge to ITAT Order:
The appeal was filed under Section 260A of the Income Tax Act, 1961, challenging the ITAT's order dated 18th December, 2008. The case involved an assessee who had obtained a license from Nike company for marketing and selling Nike products in India. The dispute centered around the royalty payment of 5% of domestic sales made by the assessee for using the Nike trademark. Both the Commissioner of Income Tax (Appeals) and the ITAT ruled in favor of the assessee, concluding that the royalty expenditure was revenue and not capital expenditure.

Royalty Fees Classification:
The key issue was whether the payment of royalty fees by the assessee constituted revenue or capital expenditure. The court emphasized that if an expenditure results in the creation of a capital asset or provides an enduring advantage, it is considered capital expenditure. In this case, the CIT(A) and ITAT determined that the royalty payment was for the use of technical information and trademark provided by Nike, directly related to sales made during the year, making it a revenue expense. Since the assessee lost the right to use the technical information and trademark upon agreement termination, there was no enduring advantage gained. Consequently, the court upheld the decision that royalty fees were revenue expenditure and dismissed the appeal for lacking merit, without any cost implications.

Conclusion:
The High Court upheld the rulings of the lower authorities, emphasizing that the royalty payment was a revenue expense due to its direct relation to sales and the absence of enduring benefits after agreement termination. The appeal was dismissed, affirming that the royalty fee constituted revenue expenditure, in line with the findings of the CIT(A) and ITAT.