TMI Blog2013 (11) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... , initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee - The assessee-company has entered into a technical licence agreement with KMC, which had a 50% shareholding in the assessee-company, to manufacture and sell the contract products in India using licenced technology. The assessee-company paid a lump sum amount of 9 lakhs US Dollars to KMC to get this technology. This amount was paid in three instalments of 3 lakhs US Dollars from financial year 1996-97 to 1998-99. Apart from this, the assessee-company has been paying royalty @ 3.5% for products manufactured by using licenced technology supplied by KMC This royalty is paid @ 3.5% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,099/- and Rs. 2,26,03,382/- in assessment years 2004-05, 2005-06 and 2006-07, respectively. The assessee has claimed these expenses debited towards royalty as revenue expenditure as against which the Assessing Officer has treated them as capital expenditure, and has granted depreciation thereon. The ld. CIT(A) has taken a third view. He has treated 75% as revenue and 25% as capital. In its appeal for assessment year 2006-07, the Revenue has taken a ground that the requisite certificate of the prescribed authority under section 35(2AB) to allow weighted deduction was not filed before the Assessing Officer, but was filed before the ld. CIT(A) and no opportunity was given to Assessing Officer, so there is a violation of Rule 46A. Undeniably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of technical know-how year after year have been held by the Hon'ble Madras High Court as revenue expenditure . In this regard, reliance was also placed on the decision of Hon'ble Supreme Court rendered in the case of Alembic Chemical Works Co. Ltd vs CIT, 177 ITR 377. The ld.DR has relied on various decisions and has filed their zerox copies before us. 4. A piquant situation has arisen because it is a case where royalty was paid initially and also running expenses towards royalty are being paid year after year. As per this agreement for transfer of know-how as technical aid, initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this case are slightly different and the Hon'ble Madras High Court has held in numerous other decisions that mere grant of exclusive right to manufacture may not result in acquiring any capital asset. In this regard, decision of Hon'ble Madras High Court in the case of CIT vs Lucas TVS Ltd, 110 ITR 338 which has been confirmed by the Apex Court by dismissing the SLP of the Revenue, 196 ITR 78 (Statute); CIT vs Sundaram Clayton, 136 ITR 350 (Mds); CIT vs Brakes India Ltd, 136 ITR 322(Mad); CIT vs Lakshmi Cardt Clothing, 149 ITR 712 and CIT vs IAEC Pumps, 110 ITR 353 which has been affirmed by the Hon'ble Supreme Court in the 232 ITR 316, are relevant. The Hon'ble Jurisdictional High Court has been consistently holding that grant of right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just and prudent to apply the ratio decidendi thereof. The capital element involved definitely, in our considered opinion, can be attributed and has been covered in the lump sum payment made in the beginning, which has been allowed u/s 35AB. The Hon'ble Supreme Court, in the case of CIT vs Swaraj Engines Ltd, 309 ITR 443, has clearly held that section 35AB is to be applied in respect of expenditure on technical know-how which is in the capital field and the entire amount is allowable in case it is in the revenue filed. There are numerous cases available on this issue, but there is no need to discuss all of them. The treatment given by the ld. CIT(A) to 25% of the expenses towards royalty payment, as capital and thereafter allowing depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive at its above conclusion. 6. The ld. DR has relied on the decision of Hon'ble Supreme Court rendered in the case of Southern Switchgear Ltd vs CIT, 232 ITR 359. About this decision, we have already mentioned that the facts are slightly different in that case. Similarly, the facts in the case of CIT vs W.S.Insulators of India Ltd, 243 ITR 348(Mad), are akin to the case of Hon'ble Supreme Court in Southern Switchgear Ltd(supra), in which products manufactured by the assessee were to be tested by the licensor and the drawings and documents were not to be used by the licensee for the purpose other than the purpose of the agreement which was acquiring know-how and licence for manufacture of products based on drawings provided by the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X
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