TMI Blog2021 (8) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... g acquired by the assessee company. It is purely for use of technology for manufacturing of clutch assembly for two wheelers and four wheelers and the royalty paid based on sale percentage thereon cannot be a capital expenditure. Either having 50% control or 100% control that will not change the colour of nature of expenditure, because the royalty payment is for manufacturing or sale of manufactured products using the technical information and know-how. Precisely on these facts and circumstances the jurisdictional High Court in series of judgments have held that such a nature of payment of royalty is always a revenue expenditure. Accordingly, we hold that in the facts and circumstances of the case the payment of royalty as revenue expenditure and is allowable. Thus all the appeals of the revenue are dismissed. - ITA Nos. 1502, 1504, 443, 1503, 3663, 3667, 3664/Del/2019 - - - Dated:- 30-7-2021 - SHRI R. K. PANDA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER Department by : Ms. Nidhi Srivastava, CIT(DR) Shri Mahesh Thakur, Sr. DR Assessee by : Shri K.M. Gupta, Advocate Ms. Shruti Khimta, Advocate Ms. Saloni Shital, AR ORDER PER AMIT SHUKLA , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical information provided by FCC Japan, agreed to pay royalty as per the terms of the agreement at the rate of 5% on the difference between the net sales price actually charged by the assessee and gross sales price actually charged by FCC Japan to the assessee (i.e. on the 5% of the value addition made by the assessee). 4. In the assessment order for the assessment year 2009-10, AO required the assessee to show cause as to why royalty paid should not be treated as capital expenditure. In response, the assessee had given a detailed explanation along with the copy of agreement and also justifying that payment of royalty @ 5% for consideration of use of know-how in technical assistance is for non-exclusive and nontransferable right to use IPR and technical information in order to manufacture and sell the products and parts in India. Hence, it was claimed that it was revenue expenditure. However, Ld. AO held that royalty claimed by the assessee is capital in nature after relying upon the judgment of Hon ble Supreme Court in the case of Southern Switchgear Ltd vs CIT ([1998] 232 ITR 359 (SC). 5. It is pertinent to note that exactly similar basis for disallowances were made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty and Foreign Personal Deputation is treated as revenue expenditure. 4.3.1 A perusal of the said appellate order for AY 2005-06 shows that !he Ld. CIT(A) has duly considered the judgment of Hon ble Supreme Court in the case of Southern Switchgear Ltd vs. CIT 232 1TR 359 relied upon by the,. AO while deciding the issue. The Ld. CIT(A) has relied upon the judgment or- Hon ble Delhi High Court in the case of CIT vs. JK Synthetics Ltd. [2009] 309 ITR 371 and CIT vs. Shri Ram Pistons Rings Ltd. 220 CTR 404 (Delhi) along with other judgments and has allowed the issue in favour of the appellant. Since there is no change in facts to take a different view, in order to maintain judicial consistency and following the doctrine of judicial discipline, the addition made by the AO is deleted and the grounds of appeal are allowed. 6. Before us the Ld. DR had filed his written submissions. For the sake of ready reference, same is being reproduced hereunder : In the above case appeal has been filed before the Hon ble ITAT by the Revenue against the orders of the CIT(A) for the above years in which the royalty payment was disallowed by the AO on the ground that the same cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentage of shareholding was to be always maintained untill otherwise mutually agreed. Even in the event of any public issue or issue of scares to any financial institutions and the like the percentage of holding in the total issued capital of the assess was to be proportionately changed so that both the parties have equal shares in the issued capital remaining after such issue of shares. 3.3 Thus form the above, it is evident that both companies having equal share in the assessee had created the same to reap benefits from the technical know-how and expertise of FCC Co. Ltd in the field of clutch manufacturing. In pursuance of the JV agreement, a License Agreement dated 01-4-1999 was executed between the assessee (Licensee) and FCC Co. Ltd. (Licensor). The said agreement was subsequently followed by another agreement dated 01-10-2007 between the parties, the terms and conditions of which were similar to the previous agreement. 3.4 With regard to the ground taken by CIT(A) that the rights and license to use the Industrial Property Rights and Technical Information' granted to the assessee was non-exclusive and nontransferable, it is submitted that the Ld. CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been an exclusive right for 15 years even though the license agreement stated that the same was nonexclusive in nature. Thus, it can be stated that the term nonexclusive in the license agreement is a misnomer when examined in the context of the facts existing. To this extent, the Ld. CIT(A) was not correct in holding that since the right available to assessee was non-exclusive in nature hence the royalty payment was allowable expenditure. 3.6 Another ground for deletion by CIT(A) was that the benefit was not enduring in nature as the same was available only during the duration of the agreement and not after its termination. This argument is also not valid considering the facts of the case. As per para 2 of the termination clause in the license agreement. In the event of termination, licensee shall promptly return to the licensor all documents and other tangible proper:, supplied by the licensor in connection with the agreement and shall keep confidential ali technical information received from the licensor and shall cease using and shall remove all marks used on the products such as trade names and trademarks owned by the licensor and/or designated trademarks and shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other parts prior to the license agreement then in such a case it would have been relevant whether the rights granted by the agreement were exclusive, non-transferreable and would continue post termination of the agreement. 4. Reliance is placed on the order of the Hon ble Supreme Court in the case of Honda Siel Cars India Ltd. V. CIT, Ghaziabad dated 09-06-2017 (395 ITR 713). The facts of the case are similar to the assesese. In the said case also the assesse i.e Honda Siel Cars India Ltd. Was newly created on the basis of the JV agreement. The assesse was granted indivisible and non-transferable right to manufacture in India. The appellant had during the currency of the agreement only the right to access the technical know how/technology. The agreement was for a period of 10 years and on the expiry of the agreement the appellant was duty bound to return all copies of the drawings, designs etc made available. For providing the aforesaid facilities a lump sum fee of 30.5 million US dollar was to be paid, besides appellant was liable to pay royalty of 4% on internal and exports. The appellant claimed the lump sum fee to be revenue expenditure which was held by the Apex cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical knowhow but rendered valuable services in setting up of the factory and even after the expiry of the agreement there was no embargo on the assessee to continue to manufacture the product in question, it was difficult to hold that the entire payment made was a revenue expenditure merely because the payment was required to be made on a certain percentage of the gross turnover of the products as royalty. In the facts and circumstances of the case, High Court was fully justified in answering the reference in favour of the revenue and against the assessee. 6. In view of the above, it is submitted that the Ld. CIT(A) was not correct in holding the royalty payment as revenue in nature on the grounds that the rights arising to the assessee from the License Agreement were non-exclusive, non-transferrable and not available post termination of the said agreement. 7. On the other hand Ld. Counsel had also filed his written synopsis and it was submitted that this issue now stands squarely covered qua the judgment of Hon ble Delhi High Court in the case of; Climat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he guidelines laid down by the RBI and Government of India, through any of its agencies. 9. The royalty paid by the assessee is recurring in nature which has been paying royalty over the years to FCC Col Ltd., Japan. The computation of royalty paid from Asstt. Year 2009-10 to Asstt. Year 2015-16, that is, for the years under consideration are as under:- Assessment Year Amount of Net ales (Amount in Rs.) Value addition (Amount of sale in Rs.) Royalty Paid (Amount of Royalty in Rs.) Remarks AY 2009-10 352,77,55,798 204,64,01,177 10,23,20,059 The Assessing Officer disallowed 75% of the total royalty expenditure amounting to ₹ 7,67,40,014 treating the same as capital expenditure. AY 2010-11 463,12,94,127 248,27,64,231 12,41,38,212 The Assessing Officer disallowed 75% of the total royalty expenditure amounting to ₹ 9,31,03,660 treating the same as capital expenditure. AY 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT v. Sharda Motor Industrial Ltd. In this decision, Hon ble High Court has also considered the judgment of Southern Switchgears Ltd. and held that the proposition laid down in the said judgment and the principle will not apply where the payment of royalty made is for use of technology and is non transferable and non-exclusive then it is a revenue expenditure. Again this principle has been reiterated in the case of CIT vs. Hero Honda Motors Ltd. (supra). 11. The judgment of Southern Switchgears Ltd. as referred by the Ld. AO is purely distinguishable on facts of the present case on the following grounds :- The collaboration agreement in that case was for providing of technical knowhow for setting up of a factory and operation thereof, whereas in the present case only limited right to use the technical know-how for the manufacturing and selling the products and parts during the term of the agreement has been granted to the assessee. The technical knowledge secured under the agreement was available even after the termination of the agreement, whereas in the present case the assessee was obliged to discontinue the use and return the know-how. There was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erusal of the entire submissions and the contention put forth by the Ld. DR, no way can be inferred that the license agreement gave any exclusive right to the licensee or any technical know-how is being transferred or it will lead to creation of any capital asset in the hands of the licensee giving enduring benefit either during the term of license or in the year of termination of license agreement. FCC Co. Japan even having 50% stake holding with the assessee company will not lead to an inference that there is exclusive or transferrable technical know-how which is being acquired by the assessee company. It is purely for use of technology for manufacturing of clutch assembly for two wheelers and four wheelers and the royalty paid based on sale percentage thereon cannot be a capital expenditure. Either having 50% control or 100% control that will not change the colour of nature of expenditure, because the royalty payment is for manufacturing or sale of manufactured products using the technical information and know-how. Precisely on these facts and circumstances the jurisdictional High Court in series of judgments have held that such a nature of payment of royalty is always a revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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