9911796707
TMI Blog2015 (6) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... re of Electrical Fuel Pump, filed digitally signed return of income on 30.11.2006 admitting its income as Rs. 2,77,85,819/-. Subsequently, the case was taken up for scrutiny and the assessment was completed u/s.143 (3) on 11.12.2008 wherein the ld. A.O disallowed the royalty payments to M/s.Hyundai Industries Co. Ltd., Korea for the following reasons:- i) On perusal of the agreement, it is evident that the technical knowledge gained by the assessee company gives enduring benefit to the assessee for manufacturing and industrial process initially for a period of seven years which can be further extended indefinitely on mutual agreement. (ii) The technical assistance contemplated in the agreement makes it evident that the foreign company shall supply, make available to the assessee drawing and design for manufacturing and assembling the licensed products, specifications, fabrications and assembly procedures etc. (iii) Apart from the technical know-how supplied by the foreign company, the foreign company has also conferred an exclusive right on the assessee company to manufacture and sell the scheduled products. (iv) As per the agreement, the assessee is required to pay royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue xps and capital xps was @ 3:1 ratio. 4.4. The facts of the assessee's case are identical to those involved in the case of M/s.Southern Switch Gear Ltd Vs. CIT where the Madras High Court [148 ITR 272)(Mad.) had held that since the benefits are enduring in nature, the payments are capital expenses in nature. On further appeals by the assessee, the Hon'ble Supreme Court (232 ITR 359)(SC) confirmed the decision of the Madras High Court. The relevant portion of the decision of the Hon'ble High Court of Madras in the case of M/s.Southern Switch Gear Ltd Vs. CIT (148 ITR 272)(Mad) is as under:- Sec.37(1) of the income-tax act, 1961 - Capital or revenue expenditure - Assessee company entered into collaboration agreement for 5 years with a foreign company for manufacture of switchgear etc -exclusive right granted to assessee to manufacture and sell scheduled products in Indiaeven after termination of agreement, method of production, etc. could be used by assessee -assessee paid lump sum technical collaboration fees and royalty based on net invoiced price-whether part of such payments could be disallowed as being capital in nature -held, on facts, yes. FACTS The assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, the Tribunal was justified. 4.5. The decisions of the CIT(A)-I Coimbatore and the ITAT were in 2013, where the decision of the Supreme Court in the case of M/s.Southern Switch Gear Ltd Vs. CIT supra, was not available/considered. Hence in view of the Supreme Court decision on the issue, the decisions of the CIT(A)-I,Coimbatore and the ITAT in the assessee's earlier year were not considered. 4.6. The facts involved in the present case are exactly identical to the above decision of jurisdictional High Court, as confirmed by the Apex Court, and hence squarely applicable to present assessee. Therefore, the A.O is justified in treating 25% of the running royalty payments as capital expenses and allowing depreciation @ 25%. The action of the A.O is as per the law and confirmed. The assessee fails in its appeals in this regard." 5. Aggrieved by the orders of the Revenue, the assessee is now on appeal before us. The ld.A.R reiterated its submissions made before the Revenue and the Ld.D.R argued in support of the orders of the Revenue. 6. We have heard both the parties and carefully perused the materials available on record. The Revenue has relied on the order of the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion relating to manufacture, licence, or rights, for any of the products in question in India thereby conferring on the assessee exclusive right of manufacture and the sale of the products. The right to manufacture certain goods exclusively in India should be taken to be an independent right secured by the assessee from the foreign company which was of an enduring nature. Consequently, the entire technical fees could not be allowed as a revenue expenditure. The Tribunal was, therefore, right in its view that 25% of the technical aid fees would have to be taken as being capital in nature. With regard to the disallowance of 25% of the royalty paid, the clause in the agreement indicated that the assessee paid the royalty for the acquisition of an exclusive privilege of manufacturing and selling the products and the acquisition of such a right was rightly treated by the Department and the Tribunal partly towards capital and partly towards revenue. As the Tribunal had estimated the value of the portion of the royalty relatable to the acquisition of the right of an enduring nature at 25%, the Tribunal's conclusion would have to be upheld and 25% of the royalty had to be disallowed." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty calculation sheet within 30 days after receipt of relevant invoice from Hyundam. IHD shall provide Hyundam with Royalty calculation sheet within 30 days after the last date of September and March of each year and Hyndam shall provide with mentioned invoice within 15 days after the receipt of the Royalty calculation sheet from IHD. (d) The royalty shall be payable for a period of seven (7) years from the date of commercial sales and in any event not beyond the expiry of ten (10) years from the date when this Agreement is filed with the RBI. (e) Reimbursement of expense: (i) IHD shall pay US$ 750 per day reimburse for study & train, technical guidance and cost of round tips, meals, lodging, other expenses incurred by Hyundam engine for visiting IHD toward the technical support. (ii) IHD shall send its personnel to Hyundam for training and pay US$ 500 per day for study & train, technical guidance and other expenses incurred by Hyundam at Korea." From this agreement, the following facts emerge:- (i) The royalty is paid @ 5% on domestic sales and 8% on export sales. (ii) Thus, the royalty payment is directly linked to revenue. (iii) The royalty payment is for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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