Court rules royalty payment as revenue expenditure for patented process agreement with NRDC

The court determined that the royalty payment made by a firm under an agreement with the National Research Development Corporation of India for a patented process was a revenue expenditure. The agreement granted a license for 14 years, allowing the firm to use the invention and sell the product, subject to payment of a premium and royalty. The court emphasized that the expenditure's nature should be determined by considering factors such as the purpose of expenditure and surrounding circumstances. Ultimately, the court ruled in favor of the assessee, allowing the royalty payment as revenue expenditure.

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Issues involved: Interpretation of agreement for licence of patent rights, determination of nature of expenditure as capital or revenue.

Summary:
The judgment pertains to an agreement between a firm and the National Research Development Corporation of India (referred to as "N.R.D.C.") for using a patented process to manufacture non-linear resistor compound. The agreement granted a licence for 14 years, allowing the firm to use the invention and sell the manufactured product, subject to payment of a premium and royalty. The firm later transferred the licence to another company, and the dispute arose regarding the deductibility of royalty payment as revenue expenditure. The Income-tax Appellate Tribunal held that the expenditure was of a revenue nature, allowing the deduction of royalty payment and related interest as revenue expenditure. The Tribunal referred the question of the admissibility of royalty payment as revenue expenditure to the High Court.

In analyzing the nature of the expenditure, the court considered various factors including the nature of business, purpose of expenditure, and surrounding circumstances. Referring to a previous decision, the court emphasized that the totality of circumstances should guide the determination of expenditure nature. It was highlighted that if the expenditure directly relates to the business's profit-making process, it should be considered revenue expenditure. Conversely, if the expenditure aims to acquire an enduring asset, it is capital expenditure. The court cited a Supreme Court case where payments for technical know-how were considered revenue expenditure due to the limited duration and recurring nature of the payments.

Applying the principles from previous decisions, the court concluded that the royalty payment, linked to sales and limited to a 14-year period, was of a revenue nature. Therefore, the court ruled in favor of the assessee, allowing the royalty payment as revenue expenditure.

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