TMI Blog2016 (7) TMI 1608X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to the termination by notice by either of the parties. However, no where does the agreement mention that Patent/Trademark/Software copyright/know-how is being purchased by the licensee/assessee and that the assessee will have an unfettered right over the same. The ld. DR could not point out to any clause in the agreement which would suggest that there was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. [ 2008 (3) TMI 679 - DELHI HIGH COURT ], the assessee company entered into an agreement with M/s Stanley Electric Co. Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expenditure. The Assessing Officer disallowed the claim holding that by virtue of the agreement, the assessee had derived an asset of enduring nature. On appeal, the CIT (A) allowed the assessee's claim hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Department against the order dated 30.08.2010 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2004-05 and challenges the deletion of addition on account of Royalty amounting to ₹ 1,33,83,745/-. CO 399/Del/2010 has been preferred by the assessee assailing the initiation of reassessment proceedings in AY 2004-05. 2. ITA No. 2798/Del/2012 has been preferred by the Department against the order dated 20.03.2012 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2007-08 and challenges the impugned order on three counts viz. (i) Deletion of addition of ₹ 2,42,09,240/- on account of Royalty; (ii) Deletion of addition of ₹ 18,423/- on account of extra depreciation claimed on UPS; (iii) Deletion of addition of ₹ 34,17,901/- on account of interest income. 3. ITA No. 5323/Del/2012 has also been preferred by the Department against the order dated 28.11.2011 passed by the ld. CIT(Appeals)-V, New Delhi for AY 2008-09 and assails the action of the ld. CIT(Appeals) in deleting the addition of ₹ 1,08,60,681/- on account of Royalty. Since all the appeals had a common issue, they were heard together and they are being disposed of through this common order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,423/- on account of extra depreciation claimed on UPS. 3. The ld. CIT (A) has erred on facts and in law in deleting the addition of ₹ 34,17,901/- on account of interest income. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal. Grounds of appeal (ITA No. 4785/D/2010): 1. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,33,83,745/- made on account of disallowance of royalty payment ignoring that payment of royalty was made for procuring and usage of trade mark and technical know-how , which is clearly unambiguously an expenditure capital in nature. Further, it is a case, where it can be easily construed that he assessee company owned the trade mark and technical know-how partly along with its parent company for its operation for the period of ten years. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal. Grounds of CO No. 399/D/2010: 1. The ld. CIT(A) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue arises, it is not possible to form any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation . The Supreme Court further held that a particular outlay is capital or revenue. And, therefore, once for all test as well as the test of enduring benefit may not be conclusive. Consequently, the various items and conditions of the agreement, the advantages derived by an agreement, are all to be taken into account and then it has to be decided whether the whole or a part of the payment thus made is a capital expenditure or a revenue expenditure. The Courts have applied different expenditure starting of a new business on the basis of technical know-how received from the foreign firm, exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payments made by the company to the foreign firm, whether a definite one or dependent upon certain contingencies, right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical information recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and technical know-how with no right to sub-license was available to the assessee and that the ownership was never transferred to it at any stage. 8. On the issue of extra depreciation on UPS, it was submitted that UPS formed integral part of the computer system as the same was being used only with computers and not otherwise and hence depreciation was rightly allowable at 60% instead of 15% as allowed by the AO. On the issue of addition on account of interest income, the ld. AR submitted that in 2006, the company has lodged claims with Wockhardt Lifesciences Ltd (WLS) for non fulfillment of certain conditions specified in the Business Transfer Agreement (BTA). Pending settlement of such claims the company (assessee) has placed a deposit in Fifth Escrow Account of ₹ 8292600/- with the Citi Bank , escrow agent. Both the parties have filed their statement of claims account and the fixed deposit shall be en-cashed by the winning party as and when the case is decided in arbitration. This fact was declared by the appellant in the balance sheet. The interest accrued on the escrow account in the last four years and its declaration schedule per the following table - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the licensor s right to protect the patent rights, trademark rights and software copyright rights and know-how rights. Clause 9 provides that either party can terminate either the whole or part of the agreement upon service of 30 days prior notice to the other party and that the initial tenure of the agreement is for ten years which is extendable for one year every year subject to the termination by notice by either of the parties. However, no where does the agreement mention that Patent/Trademark/Software copyright/know-how is being purchased by the licensee/assessee and that the assessee will have an unfettered right over the same. The ld. DR could not point out to any clause in the agreement which would suggest that there was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. 173 Taxman 390 (Delhi), the assessee company entered into an agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in Jonas Woodhead Sons ((India) Ltd. v. OT [1997] 224 ITS 342/91 Taxman 1 and in Empire Jute Co.Ltd. v. CIT [1980] 124 iTR 1/3 Taxman 69 was fully applicable to the facts of the instant case and both the authorities were right in concluding that the payment made by the assessee towards licence fee to S' was a revenue expenditure. 11. In the case of Shriram Pistons Rings Ltd. Vs. CIT, New Delhi - [2008] 171 Taxman 81 (Delhi), the facts of the case were that the assessee company had entered into a technical collaboration agreement with a Japanese company, 'R' for the manufacture of piston rings. The said agreement mentioned that the technical know-how would be sold by 'R' to the assessee for a fixed amount and the payments would be made on the fulfillment of certain conditions. The agreement enabled the assessee to sub-license the technical knowhow to another Indian party subject to the prior written permission of 'R'. The validity of the agreement was for a period of five years, but it could be terminated before the expiry of that period in the event of any default by any of the parties. The agreement laid down that the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sum amount for transfer of technical know-how and running royalty at a specified rate per piece of production of different products. The assessee showed the lump sum payment against transfer of technical know-how provided by the Korean company as capital expenditure and claimed that the royalty was business expenditure. The Assessing Officer treated the royalty as capital expenditure. The order of the Assessing Officer was reversed by the Commissioner (Appeals) and this was affirmed by the Appellate Tribunal. On appeal, it was held as under:- That the finding of the Commissioner (Appeals) that the payment of royalty was purely a revenue expenditure, which was annual expenditure depending upon the quantum of production in the relevant year was a finding of fact rightly arrived at. 13. In the above mentioned case of Sharda Motors (supra), their Lordships discussed the earlier decision of Hon ble Jurisdictional High Court in the case of CIT Vs. J.K.Synthetics Limited - [2009] 309 ITR 371 (Delhi) wherein their Lordships have enumerated certain principles for determining whether the payment of royalty is a capital expenditure or revenue expenditure. The same is discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the case cited by your honour and the facts of our case. On the facts and after applying the aforesaid principle, it becomes crystal dear that the expenditure is of revenue nature. 14. In the case of Climate Systems India Ltd. Vs. CIT - [2009] 319 ITR 113 (Delhi), the facts of the case were that the assessee company engaged in the manufacture and sale of heat exchangers (radiators) entered into technical collaboration agreement with a US company to manufacture radiators with technology owned by the US company. Under the agreement, the assessee was permitted to use the technology for manufacture of upgraded radiators for which the assessee was to make a lump sum payment of US $ 1 million to the US company, which was capitalized in the assessee's books of account and a royalty of 3 per cent, of domestic sales and 5 per cent, of export sales to the US company for a period of 7 years for using the technology and for availing of technical services. During the previous year relevant to the assessment year 2002-03, the assessee paid to the foreign collaborators royalty calculated at 3 per cent, of domestic sales and at 5 per cent, of export sales and claimed deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bly and sale of products during the term of the contract and the license was to pay royalty to the licensor. The drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For this purpose, the training of the personnel of the assessee was imperative. Under the agreement, the know-how acquired related to the process of manufacturing and for a technical and the documents, designs and specifications which had been supplied by the licensor were only for facilitating this purpose of manufacturing. This was basically in the realm of technical support. 16. In the assessee s case the Department has heavily relied upon the decisions of the Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra), for holding that the payment of royalty is capital expenditure but, the Assessing Officer has not fully applied that decision because in the case of Jonas Woodhead and Sons (India) Ltd. (supra) , only 25% of the royalty payment was held to be capital expenditure and 75% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08. As per practice with the bank interest on FDR/Escrow Account is credited on accrual basis. The bank kept on giving credits for the interest accrued to the appellant and TDS was also deducted as and when the interest, amount was credited in the appellant's a/c The appellant however, did not have any legal right to withdraw the amount of deposit and neither of the accrued interest from the Escrow Account because the matter was pending before the arbitrator. The legal right of the appellant arose only when the arbitrator gave its award in the previous year relevant to AY 2009-10 in favour of the appellant. The appellant has declared interest of ₹ 1,62,71,958/- in its return of income for AY 2009- 10 cause the interest income has accrued to it during the AY 2009-10. The breakup of the interest pertaining to the AY 2006- 07, 2007-08, 2008-09 2009-10 credited by the bank in its account has been given by the appellant as noted above. Since the appellant did not have any right to claim the interest, it did not have any income accrued to it on account of interest in the Asst. Years preceding 2009-10. However, since the TDS was deducted on the interest credited ..... X X X X Extracts X X X X X X X X Extracts X X X X
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