TMI Blog2015 (6) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Learned Commissioner of Income Tax(A)-II, Chennai dated 17.06.2014 in ITA No.919/2013-14 passed under Sec.143(3) read with section Sec. 250 of the Act. 2. The Assessee has raised four elaborate grounds in its appeal; however the crux of the issue is that the Assessee is aggrieved by the order of the Ld. CIT (A), who had upheld the order of the Ld. Assessing Officer in disallowing:- (i) the entire amount of ₹ 30,41,829/- incurred towards running royalty. (ii) 25% of the running royalty as capital in nature amounting to ₹ 5,70,344/- and allowing depreciation thereof. 3. The brief facts of the case are that the assessee is a company, engaged in the business of manufacture of Electrical Fuel Pump, filed digitally signed return of income on 30.11.2006 admitting its income as ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the agreement. This category of up-front royalty forms a capital expenditure because the benefits of the payments accrue to the assessee for a number of years. Therefore this amount is a capital expenditure. The second category of royalty payment is annual payment , which is normally calculated at a fixed percentage of the assessee s manufacture and sale of the items. 4.3. In the present case, the royalty payment falls under the secondcategory, i.e annual payment calculated at a fixed percentage of the assessee s manufacture and sale fo the items. The assessee claimed this as revenue xpn. However, the A.O treated 25% of this payment as a capital xpn by relying on the decision of the Hon ble Supreme Court in the case of M/s.Southern Switch Gear Ltd Vs. CIT (232 ITR 359) (SC) where the Supreme Court has held that the ratio of the royalty expenses to be considered as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmed the disallowance of the 1/4th royalty. The Tribunal confirmed the view of the AAC. On reference: High Court Held - Even without acquisition of an asset, a right of a permanent advantage could be acquired and the cost of acquisition of such a right could be taken to be capital expenditure. In the instant case, though the duration of the agreement was five years, the assessee even after the expiry of the period, could use the methods of production, procedure, experiments, improvements, which had been made available to them in pursuance of the agreement. Thus, the assessee had acquired knowledge of enduring nature. In addition to the acquisition of technical knowledge, the assessee company got an exclusive right to manufacture and sell its articles without any objection from anyone including the foreign company and this was clearly an advantage of enduring nature. Accordingly, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was an element of capital expenditure in the technical aid fees paid, he did not agree with the officer that the entire payment should be treated as being capital in nature and restricted the disallowance to 1/4th of the technical aid fees paid. He also confirmed the disallowance of the 1/4th royalty. The Tribunal confirmed the view of the AAC. On a reference: Held, that a perusal of the various clauses of the agreement clearly indicated that the technical knowledge that the assessee obtained through the agreement with the foreign company secured to the assessee an enduring advantage and benefit in that the same was available to the assessee for its manufacturing and industrial process even after the termination of the agreement . The foreign company had also agreed not to manufacture in India any of the products in question or grant or make available to any other person any information 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. (b) Net ex-factory sales price shall be the gross invoice value of the Licensed Products sold or otherwise disposed of by IHD in normal, bonafide, commercial transaction without any deduction other than the following items of expenses, if any, to the extent to which they are actually paid and included in the gross invoice price. 1. Imported component 6. Packing expenses on sale 2. Sales discount 7. Transport expenses on sales 3. Sales returned 8. Sales commissions 4. Indirect taxes like ED, Sales tax, VAT 9. Advertisement fee 5. Insurance premiums in sales 10. Installation expenses at places where the licensed products are to be used. (c) Royalty shall be computed for six months period terminating the last date of September and March of each year. IHD shall make payment to Hyundam within 30 days after receipt of relevant invoice from Hyundam. IHD shall provide Hyundam with Royalty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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