2017 (3) TMI 396 - HC - Income Tax

High Court rules royalty payments as revenue expenditure, not capital. Upholds tribunal decision.

The High Court of Allahabad determined that royalty payments made by the assessee to a Japanese company for technical assistance were revenue expenditure, ... Allowable business expenditure - payment of royalty paid to M/s Hongo Japan - Held that:- The expenditure incurred by the assessee towards royalty and fee for technical assistance in pursuance of the licence agreement entered between the assessee and the company M/s Hongo Japan were revenue expenditure and not capital in nature in view of the fact, upon termination of the licence agreement, all rights created in favour of the assessee under the licence agreement stood extinguished and no benefit was passed on to or retained with the assessee. This court in the case of CIT versus Kanpur Cigarettes (P) Ltd. [2005 (3) TMI 61 - ALLAHABAD High Court ] has in respect of a similar clause in the licence agreement held that nature of expenditure is revenue and not capital. The facts of the existing case in material part is similar to those in the case of Kanpur Cigarettes (supra). - Decided in favour of the assessee Issues:Interpretation of royalty payments as revenue or capital expenditure.Analysis:The High Court of Allahabad heard the appeal regarding the nature of royalty payments made by the assessee to a Japanese company for technical assistance. The court considered whether the payments were capital or revenue expenditure. The assessee had a license agreement with the Japanese company, which required royalty payments during the agreement period. The Assessing Officer treated the payments as capital expenditure, disallowing the revenue claim. However, the tribunal, based on an earlier order for a different assessment year, deemed the payments as revenue expenditure. The tribunal analyzed the agreement clauses and determined that the benefits under the license agreement were not enduring and were purely revenue in nature. The High Court concurred with the tribunal's decision, stating that upon termination of the agreement, all rights created for the assessee ceased to exist, indicating the revenue nature of the expenditure.The High Court referred to a previous case involving a similar clause in a license agreement, where it was held that such expenditures were revenue and not capital in nature. Drawing parallels between the previous case and the current situation, the court found no errors in the tribunal's assessment of the payments under the license agreement. Consequently, the court affirmed the tribunal's decision, dismissing all appeals in favor of the assessee and against the revenue department. The judgment concluded by stating that there was no need for court intervention, and the tribunal's decision was upheld without costs.