TMI Blog2009 (12) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... ensor. CIT (A) treated 5 per cent of the royalty as capital in nature. HELD THAT:- In terms of the agreement, there is no dispute to the fact that the assessee had been given only right to use know-how and the patents and at no point of time any property of enduring benefit has been transferred in favour of the assessee. In view of the decision of the in the case of CIT v. Ciba of India Ltd.[ 1967 (12) TMI 3 - SUPREME COURT] , it can safely be concluded that where the assessee cannot assign or sub-license any part of the right obtained from the know-how, the payment made therefor cannot be termed as capital in nature. In the instant case, RML has not provided any assets to the assessee for establishing any factory, by giving right to use technical know-how, no asset of enduring nature was acquired and upon termination the assessee was not entitled to use the industrial properties and know-how of RML. Enduring benefit can be said only if right to manufacture is given even after termination of the agreement. In the result, the ground taken by the assessee with regard to revenue nature of royalty payment is allowed, whereas the ground of the Revenue is dismissed in both the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I RAJPAL YADAV, JM AND SHRI R.C.SHARMA, AM ORDER PER R.C.SHARMA, AM : The order of the Bench was delivered by R. C. Sharma (Accountant Member).-These are cross-appeals filed by the assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals) for the assessment years 2005-06 and 2006-07, in the matter of the order passed under section 143(3) of the Income-tax Act, 1961. 2. The rival contentions have been heard and record perused. The facts in brief are that the assessee is an Indian company formed as a result of joint venture between Modi Mundipharma Pvt. Ltd. (MMPL) and Revlon Mauritius Ltd. (RML) for manufacturing and marketing of Revlon products in India and neighbouring countries on an exclusive basis. MMPL and RML had invested in the ratio of 74:26 to form the assessee-company. As per the joint venture agreement, MMPL was responsible for the setting up, manufacturing, distribution and marketing of the Revlon products in the designated territory whereas RML was responsible for providing know-how, trade mark, etc. The assessee had entered into a technical know-how agreement with Revlon Mauritius Ltd. for the supply of technical know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the FIPB, Government of India. According to their letter bearing No. FC.II.27(94) dated January 14, 1994, the duration of the agreement approved was ten years from the date of agreement or seven years from the date of commencement of commercial production. Accordingly, the seven years term expired on August 29, 2002. Pursuant to press note No. 2 of 2003 dated June 24, 2003 issued by the Government of India, the assessee made a request to the Government on July 21, 2003 for seeking extension of technical collaboration agreement. The Department of Economic Affairs, Government of India accorded the approval by letter of even No. dated August 6, 2003. Accordingly, the supplement agreement dated September 16, 2003 was executed between RML and the assessee, which is made effective from October 1, 2003. Clause 1 of the said supplement agreement reads as under : The agreement will continue from October 1, 2003 until such time as both parties mutually decide to terminate the agreement. 6. According to clause 3 of the agreement, this supplement agreement is part of the original assessment except as modified and therefore, all the terms and conditions remained unchanged. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 and so on. Thus, it is clear that the know-how has not been sold to the company and the licensor has an exclusive ownership of the know-how, therefore there is no reason to disallow the expenditure incurred on royalty payment which is revenue in nature, by treating the same as capital expenditure. 7. The Commissioner of Income-tax (Appeals) has accepted the assessee's method of computing royalty on the basis of sales value of WML and addition made in this regard of Rs. 21.39 million is deleted. However, the Commissioner of Income-tax (Appeals) has made ad hoc addition of 5 per cent. of royalty relying on the hon'ble Supreme Court judgment in the case of Southern Switch Gear Ltd. [1998] 232 ITR 359. The Commissioner of Income-tax (Appeals) has made a chart showing comparison of the facts of the case of Southern Switch Gear and the assessee's own facts and found out that only one fact, i.e., the assessee has an exclusive right to manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee-company to its sister concern and joint ventures. The Assessing Officer has allowed only Rs. 30 lakhs as director's remuneration and disallowed Rs. 58.98 lakhs under section 40A(2), by alleging the same as unreasonable and excessive. The Commissioner of Income-tax (Appeals) deleted the same by observing that the Assessing Officer has wrongly stated that no services have been rendered by MMPL. A categorical finding was recorded by the Commissioner of Income-tax (Appeals) to the effect that rendering of services by MMPL was amply proved from the records, no disallowance was warranted under section 40A(2), aggrieved by the same, the Revenue is in appeal before us. 11. We have considered the rival contentions and found from the record that the consultancy charges have been paid in lieu of MMPL for providing various advices as discussed in the above paragraph. Mr. U. K. Modi has represented one of the joint venture parties, MMPL, as director, in the business of collaboration with RML. We found him as an instrument in negotiating the collaboration as representative of MMPL for which he himself gave his personal undertaking. We also found that Mr. U. K. Modi did n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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