TMI Blog2015 (10) TMI 2313X X X X Extracts X X X X X X X X Extracts X X X X ..... hing factor is sufficient to answer the Question in favour of the revenue and against the assessee. Expenditure on account of payment of royalty - revenue v/s capital expenditure - Held that:- It is agreed to be paid by the assessee and the same needs to be treated as revenue expenditure particularly considering the fact that the same is linked to the percentage of consideration received on sale of the products produced by the assessee by use of the Germplasm and with the help of the technical know-how. - Decided against the revenue. - ITTA No. 153 of 2004 - - - Dated:- 9-10-2015 - G. Chandraiah And Challa Kodanda Ram, JJ. For the Petitioner : Shri J V Prasad For the Respondent : Sri Percy Pardivala JUDGMENT ( Per: G. C.,J. ) This appeal is filed by the Revenue under Section 260-A of the Income Tax Act, 1961 (for short, the the Act ), questioning the order dated 21.02.2003, passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad, in I.T.A.No.37/Hyd/99, for the assessment year 1995-96, raising the following substantial questions of law for consideration of this Court: i) Whether on the facts and in circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the respondent/assessee. The facts are not in dispute. The principal question which falls for consideration in the present case and the facts as found by the Tribunal as to whether the expenditure incurred by the respondent-assessee is to be fully allowed as a revenue expenditure or a part of it is to be capitalized as a capital expenditure . It is well recognized by various judicial pronouncements that a particular expenditure is revenue or capital in nature is a vexed question and the same would have to be determined in each case on appreciation of the facts of the particular case. The question as to whether the amount paid for acquiring Germplasm and Technical know-how needs to be determined with particular reference to the terms of the contract and agreement between the assessee and the foreign company Zeneca Limited, U.K. Though, the assessing authority sought to invoke Section 35AB of the Act to the expenditure, the C.I.T Appeals after analyzing the nature of transactions involved in the agreement had categorically negatived the same. It may be noted that the revenue did not question about the decision of the C.I.T Appeals, so far as Section 35AB of the Act, has no app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that may result on account of constant research on the part of the licensee and licensor and it is provided distinctly as to how the improved property could be shared based on certain definitive parameters. With regard to 5th test considering the nature of the technology and the rapid advancements taking place in the filed of biotechnology, it was found that there is enduring benefit that is derived by the assessee. So far as the 6th test is concerned, the same was not dealt with as in the present case the payment was one lump sum payment for acquiring Germplasm along with technical know-how and the duration of the agreement was five years. Before us, on behalf of the revenue, it was emphatically canvassed that the assessee had acquired Germplasm which itself is an asset and further the technical know-how for use to exploit the same for the purpose of the assessee's business. The technical know-how and the Germplasm is an asset of capable of giving an enduring benefit to the assessee and further considering the facts on record had rightly apportioned the expenditure in the ratio 1/4th as capital in nature and 2/3rd in the nature of revenue by applying the legal tests laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ests by reference to various cases earlier. In the context of the guidance provided in those judgments, we may consider the arguments advanced before us. At this stage, we may note that the CIT Appeals itself did not agree with the views of the assessing officer in entirety and however found that only a small portion of the expenditure could be treated as capital in nature by applying the principles laid down in the case of Southern Switchgear Limited (2 supra) whereas the assessee had relied on the judgment reported in a case of CIT vs. I.A.E.C (Pumps) Ltd (1998) 232 ITR 316 (SC) as more appropriate. All the cases ultimately emphasis as a rule, the analysis and proper understanding of the agreement between the parties as providing a correct picture with respect to the aspect as to how a particular expenditure is to be treated. In the case on hand, we had set out the findings as recorded by the Tribunal in the earlier paragraphs. In the present case, there is no challenge to the findings recorded by the Tribunal by raising a question of perversity of a fact. In view of the settled principles of law, the questions raised before us are required to be considered and answered on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or technical know-how. C.I.T (Appeals) had apportioned the same, 1/4th as on capital account and 2/3rd on revenue account. Under the licensing agreement, the products produced or developed with the Germplasm and the technical know-how provided under the agreement are the revenue earning products for the assessee. In other words, they are material or tools in the hands of the assessee for generating the revenue. The agreement is valid for a period of five years from the date of commercial production and eight years from the date of execution. In the sense, the Germplasm is the revenue earning apparatus. The technical knowledge which has been acquired in the process of implementation particularly in the bio-technology filed would certainly benefit the assessee even after the expiry of the agreement period and there is no embargo on the assessee for using the expertise and knowledge acquired. Further, by clearly defining 'Licensee Germplasm' and 'Licensor Germplasm' and setting out a right to access the 'Licensor's' improvements during the currency of the agreement the agreement has ensured the benefits of research, development and improvements to the Licen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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