TMI Blog2017 (6) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure - Decided against the assessee - CIVIL APPEAL NO. 4918 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 2140 OF 2017), CIVIL APPEAL NO. 4919 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4261 OF 2017), CIVIL APPEAL NO. 4920 OF 2017 (@ SPECIAL LEAVE PETITION (CIVIL) NO. 4319 OF 2017), - - - Dated:- 9-6-2017 - Mr . A . K . Sikri And Mr . Ashok Bhushan JJ . CIVIL APPEAL NO . 4921 OF 2017 ( @ SPECIAL LEAVE PETITION ( CIVIL ) NO . 4356 OF 2017 ) AND CIVIL APPEAL NO . 4922 OF 2017 ( @ SPECIAL LEAVE PETITION ( CIVIL ) NO . 4249 OF 2017 ) For the Petitioner : Ms . Manasvini Bajpai, Adv . , Mr . R . Chandrachud, Adv . For the Respondent : Ms . Sadhna Sandhu, Adv . , Ms . Nivedita Nair, Adv . , Ms . Gargi Khanna, Adv . , Mr . Natkarni Nisha Bagchi, Adv . , Ms . Anil Katiyar, Adv . And Ms . Sangita Rai, Adv . JUDGMENT A . K . SIKRI, J . Assessee in all these appeals is Honda SIEL Cars Ltd. (hereinafter referred to as the Assessee ). Question of law that is raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the subsequent years, the Assessing Officer again treated the royalty paid as capital expenditure. The assessee filed appeals before the CIT(A) which were dismissed. However, further appeals before the Income Tax Appellate Tribunal (ITAT) were allowed and the ITAT held that the expenditure is to be treated as the revenue expenditure. Against the order of the ITAT, the Department went in appeal before the High Court of Allahabad which has allowed these appeals thereby reversing the order of the ITAT and agreeing with the view taken by the Assessing Officer the payments of royalty expenditure in-question are to be treated as capital expenditure. In the present appeals challenging the impugned judgment dated December 21, 2016 passed by the High Court is challenged. 5) With the aforesaid preliminary remarks about the nature of controversy, we now proceed to take note of the facts in some detail. 6) As mentioned above, joint venture company, namely, the assessee was incorporated by HMCL, Japan and SEIL, India. 8. Total share capital of HSCIL/Assessee was 36 crores shares out of which 35,63,99,995 shares were held by HMCL, Japan while remaining 3600005 shares held by M/s. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.2 The total amount of royalty specified in the counter signed report and invoice under Article 13.1 hereof shall be payable by licensee in the currency of US Dollars by bank transfer remittance to the bank account designated by LICENSOR, so that such remittance shall reach LICENSOR not later than the 10th day of month next following the month in which such countersigned report and invoice reach licensee. In the event the currency in which the amount of running royalty is calculated differs from the currency in which payment of the running royalty is to be made, then conversion shall be made in accordance with the final quotation of the telegraphic transfer selling rate of exchange prevailing at the time of remittance by the Delhi office of any international bank, mutually agreed separately. 14.3 All payments and remittances by licensee will be subject to Tax Deduction at Source (TDS)/levy of CESS (under Research and Development Cess Act, 1986). Receipt by LICENSOR of any payment tendered hereunder shall not constitute LICENSOR'S acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by licensee to LICENSOR hereunder s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance of obligations under the agreement, as contemplated in Clause 20.1. Consequence of termination of agreement is provided in Article 21 and reads as under: 21.1 In the event of the expiration or any other termination of this Agreement for any reason whatsoever, (except where the parties have taken steps for the renewal of the agreement) and unless otherwise agreed upon by the parties hereto, 1. licensee shall, within 90 days, discontinue (I) the manufacture, sale and other disposition of the Products and the Parts, and (ii) the use of the Intellectual Property Rights, Technical Information licensed or furnished by LICENSOR under this Agreement. 2. licensee shall promptly return to LICENSOR all particular documents and tangible property supplied by LICENSOR in connection with this Agreement and belonging to LICENSOR and shall keep all Information received by licensee hereunder secret and confidential in accordance with Article 7 hereof; 3. licensee shall not be entitled to demand from LICENSOR, for the reason of the expiration or termination of this Agreement or the failure to renew or extend it, any damages, reimbursements or other payments on account of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) As is clear from the reading of Article 14 of the Agreement, the aforesaid royalty in 5 equal installments was to be paid for the right in license that was granted by the HMCL, Japan to the assessee under Article 2 as well as for furnishing of technical information under Article 4.2. Under the aforesaid articles, HMCL, Japan had to provide manufacturing facilities, know-how, technical information and it also gave information regarding intellectual property rights to the assessee which the assessee was entitled to exploit only as a licensee and without getting any rights in the said intellectual property belonging to HMCL, Japan. The terms manufacturing facilities, intellectual property rights, know-how and technical information were defined in clauses 3, 5, 6 and 7 of the Agreement which reads as under: 3. The term Manufacturing Facilities shall mean jigs, tools, dies, machinery and equipment which licensee for the manufacture, assembly, testing of inspection of the products. 5. The terms Intellectual Property Rights shall mean those patents, utility models design patents and other intellectual property rights directly relating to the Products or the licensed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Memorandum on exchange of technician (b) Memorandum on supply of parts (c) Memorandum on supply of manufacturing facilities 9) It is on the analysis of the aforesaid clauses of the Agreement that issue needs to be decided. As per the Revenue, technical know-how and royalty payments are of enduring nature and, therefore, they would qualify as capital expenditure. On the other hand, the assessee maintains that it had acquired mere right to use technical information provided by HMCL, Japan and, thus, it did not lead to creation of any asset of enduring nature. Therefore, it was to be treated as revenue expenditure. 10) The High Court, after taking note of various judgments on the subject and the principles laid down in those judgments, came to the conclusion that royalty was for enduing benefit of the business. It was not only for running the business but for bringing the business into existence and then for running and sustaining it. In other words, main reason which persuaded the High Court to come to the aforesaid conclusion was that there was no existing business which needed to be improvised with the aid of technical know-how. This TCA was executed with the aim and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding of HMCL, Japan in the assessee which was of no relevance. The learned counsel laid much emphasis that in terms of TCA, the appellant had only acquired the right to use the technical know-how provided by HMCL for manufacture of products, during the currency of the TCA, which was for an initial period of ten years from the date of agreement or seven years from the date of commercial production. The ownership rights in the know-how continued to remain with HMCL, Japan and the appellant was not authorized to transfer the know-how license to any other person or assign or convey the same to any third party. Thus, what the appellant acquired was only a limited right to use and exploit the know-how for manufacture of products and parts. 12) The learned counsel for the Revenue refuted the aforesaid submissions of Mr. Tripathi. His contention was that finding of fact was arrived at by the Assessing Officer, which was confirmed by the CIT(A) as well that a new asset in the form of setting up of a new company had come into existence with the aid of technical know-how and, therefore, the expenditure in-question was capital expenditure. He further submitted that the view which was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect that for setting up the manufacturing facilities and for the tax, separate agreements had been entered into by the parties and separate payments were made by the assessee as consideration therefor. This makes it clear that the payment of technical know-how and royalty are not part of payments for setting up the plant which manufactures the Honda cars in India but, were made to enable the assessee to manufacture the Honda cars in India which are its stock and trade. The Tribunal was conscious of the fact that this TCA was also entered into at the time of setting up of the fact and since the know-how was being obtained for the first time and was crucial to the setting up of the business of the assessee. It posed a question as to whether this could make the difference and the expenditure was to be treated as capital expenditure. However, after noticing that no such distinction was drawn by Delhi High Court in Shriram Refrigeration Industries Vs . Commissioner of Income Tax (1981 (127) ITR 746) and Triveni Engineering Works Ltd . Vs . CIT (1981 (136) ITR 340) and the test applied was as to whether the expenditure, whether incurred at the time of settin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as capital expenditure. In contradistinction to the cases where expenditure of concurrent and reoccurring nature is incurred and the later would belong to revenue field. Technical information and know-how are intangible. They have different and distinct character from tangible assets. When the expenditure is incurred to acquire a tangible asset, determination as to whether the said acquisition of tangible asset is of capital nature or the expenditure is of revenue nature, may not pose a problem. However, in case of technical information and know-how, having regard to their unique characteristic, the questions that need to be posed for determining the nature of such an expenditure are also of different nature. In case where there is a transfer of ownership in the intellectual property rights or in the licences, it would clearly be a capital expenditure. However, when no such rights are transferred but the arrangement facilitates grant of licence to use those rights for a limited purpose or limited period, the Courts have held that in such a situation, the royalty paid for use of such technical information or know-how would be in the nature of revenue expenditure as no enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty payment was treated as capital expenditure till the stage of the High Court. This Court reversed the judgment of the Courts below by holding the expenditure would be revenue in nature. In its judgment, the Court culled out certain principles laid down therein to determine, whether expenditure of assessee was Capital Expenditure or Revenue Expenditure and said: (i) When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital (referred to British Insulated Helsby Cables Ltd. v. Atherton, [1926] AC 205). (ii) If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that there is no single test or principle or rule of thumb which is paramount. It is ultimately a question of law, but a question which must be answered in the light of all the circumstances which are reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case, must depend on common sense rather than on strict application of any single legal principle. It was also observed that solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances, some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all guiding features which must provide the ultimate answer. This Court also said that the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of Capital or Revenue a judicial fetish. What is 'Capital Expenditure' and what is 'Revenue' are not eternal varieties but mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scontinue manufacture, sale and other disposition of products, parts and residuary products. All these things then shall be at the option of licensor. In other words, licensee in such contingency would hand over unsold product and parts to licensor for sale by him. In case licensor does not exercise such an option and the product is allowed to be sold by licensee, it would continue to pay royalty as per rates agreed under the agreement. Clauses 19 and 21, in our view, make the Agreement in question, i.e., establishment of plant, machinery and manufacture of product with the help of technical know-how, co-extensive, in continuance of Agreement. The Agreement also has a clause of renewal which, in our view, in totality of terms and conditions, will make the unit continue so long as manufacture of product in plant and machinery, established with aid and assistance of foreign company, will continue. Since, it is found that the Agreement in question was crucial for setting up of the plant project in question for manufacturing of the goods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure. The Tribunal is conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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