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2012 (9) TMI 48 - DELHI HIGH COURTExpenditure on Royalty - Revenue or Capital ? - Held that:- According to various clauses of the know-how licence agreement read along with the supplement agreement royalty payable as net sales of taxes the know-how was provided by the contract manufacturer for the limited purpose of manufacture of Revlon products only. The responsibilities of the contract manufacturer were clearly defined in the agreement between the assessee-company and the contract manufacturer, according to which obligation relating to royalty payment was not passed on to the contract manufacturer. The entire benefit of the know-how was meant for manufacturing the products to be supplied to the company and there was no obligation of the contract manufacturer (i.e. the assessee’s sister concern) to pay royalty to the licensor - the fact that the assessee chose to manufacture through a contractor, i.e. its sister concern, in this Court’s opinion does not undermine its status as a licensee, responsible to pay the royalty - Clause 12.01 of the agreement stipulates that upon expiration or termination of this agreement, the licensee shall have no right to exploit or in any way to use the know-how and shall forthwith discontinue all use of the know-how and shall not thereafter use the know-how, thus the revenue’s arguments that the royalty amount to be in the nature of capital expenditure, is meritless - in favour of assessee. Disallowance of publicity expenses - Held that:- The reasoning for disallowance of 50% of expenses as the advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld as brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognized, and allowed - in favour of assessee. Disallowance of consultancy charges u/s 40A (2) - Held that:- In order to determine whether the payment is not sustainable, the AO has to first return a finding that the payment made is excessive, under Section 40-A (2) and only if it is found to be so, then the AO has to determine what constitutes the fair market value of the services rendered and disallow the difference between what is claimed and what is such value determined (as fair market value). Apart from the fact that no such exercise was undertaken by the AO, the Court sees that the assessment order went off into a tangent, in following a method that was clearly inapplicable - in favour of the assessee.
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