2019 (10) TMI 855 - AT - Income Tax

Tax Tribunal: License Fee for Non-Exclusive License Deemed Revenue Expenditure

M/s Eli Lily and Co. Limited Versus DCIT, Circle 1 (1), Gurgaon.

The tribunal concluded that the license fee paid by the assessee for a non-exclusive license was a revenue expenditure, as it was for limited use of ... Expenditure of licence fee - revenue or capital expenditure - payment was made for limited license to use the technical information and regulatory approvals provided by the OLL - HELD THAT:- It is only in the case of the assessee acquiring the ownership of such know-how, the expenditure would fall in the domain of capital, lest the expenditure would be allowable Revenue deduction. Exclusiveness is otherwise of the license only impacts the company to position of the assessee in the market but does not result in creation of new profit earning apparatus. In CIT v. Modi Revlon (P) Ltd [2012 (9) TMI 48 - DELHI HIGH COURT] held that if ownership of know-how remains with the licensor, the royalty paid towards use of such know-how shall be allowable revenue expenditure notwithstanding that the licensee had an exclusive license. We are also not in agreement with the findings of the assessing officer that since the assessee had entered into the agreement to be in force for a period of 15 years, they had obtained a benefit of enduring nature in view of class 16.1 and 18.2 of the agreement where under the assessee is under an obligation to discontinue the use of technical information and regulatory approvals immediately in the event of termination of the agreement as stated therein. The benefit enjoyed by the assessee is co-terminus with the enforcement of the agreement. What is relevant to be seen here is whether the assessee held the rights under the agreements in perpetuity or at least further agreed period of 15 years in continuity or such an agreement had met with a premature termination and such a fact strengthens the argument of the assessee that no endurable benefit had accrue to the assessee under such an agreement. Technical information and the marketing approvals of a product provided by the licensor only facilitates greater acceptable of the products of the assessee leading to higher profitability in the existing business of distribution and marketing of products carried on by it, without addition to the profit earning apparatus and on this premise we return a finding that the length of advantage in terms of time derived by the assessee has no bearing on the question to decide the nature of expenditure incurred by the assessee by way of licence fee. No benefit of enduring nature had accrued to the assessee under the agreement dated 30/06/2012 entered into by the assessee with OLL and OTL and the licence fee paid by the assessee under such an agreement is in the nature of Revenue expenditure, which is allowable. With this view of the matter, we allow the appeal of the assessee. Issues Involved:1. Treatment of license fee expenditure as capital or revenue expenditure.2. Assessment of enduring benefit from the license agreement.3. Impact of non-exclusive license on the nature of expenditure.4. Premature termination of the agreement and its relevance to the assessment year.Issue-wise Detailed Analysis:1. Treatment of License Fee Expenditure as Capital or Revenue Expenditure:The assessee, engaged in trading formulations and clinical trial activities, paid a license fee of Rs. 6,93,78,000 to Onco Labs for a non-exclusive license to use technical information and regulatory approvals. The Assessing Officer treated this expenditure as capital in nature, allowing depreciation under section 32 of the Income Tax Act, 1961. The assessee argued that the expenditure should be treated as revenue, citing various judicial precedents where payments for limited use of know-how were considered revenue expenditures. The tribunal agreed with the assessee, noting that the license fee was for a limited right to use technical information and regulatory approvals, without acquiring ownership, making it a revenue expenditure.2. Assessment of Enduring Benefit from the License Agreement:The Assessing Officer contended that the 15-year license agreement provided enduring benefits, thus classifying the expenditure as capital. However, the tribunal found that the agreement did not confer any proprietary rights to the assessee and that the benefits were co-terminus with the agreement's duration. The tribunal referenced the Supreme Court's decision in Empire Jute Company, emphasizing that enduring benefit alone is insufficient to classify expenditure as capital if it merely facilitates business operations without adding to the profit-earning apparatus.3. Impact of Non-Exclusive License on the Nature of Expenditure:The tribunal addressed the Assessing Officer's argument that the non-exclusive nature of the license did not negate its capital nature. The tribunal highlighted that the assessee had control over branding, trademarks, and pricing, and the non-exclusive license did not significantly impact the nature of the expenditure. The tribunal cited the jurisdictional High Court's decision in Hilton Roulands Ltd., which held that the nature of the right (exclusive or non-exclusive) is not determinative of the expenditure's nature. The critical factor is whether the assessee acquired ownership of the know-how or merely the right to use it.4. Premature Termination of the Agreement and Its Relevance to the Assessment Year:The assessee demonstrated that the agreement was terminated within three years, countering the Assessing Officer's assertion of enduring benefit. The tribunal noted that the premature termination reinforced the argument that no enduring benefit accrued to the assessee. The tribunal emphasized that the relevant factor was whether the rights under the agreement were held in perpetuity or terminated prematurely, supporting the assessee's claim of revenue expenditure.Conclusion:The tribunal concluded that the license fee paid by the assessee was a revenue expenditure, as it was for the limited use of technical information and regulatory approvals without acquiring ownership. The tribunal allowed the assessee's appeal, emphasizing that the expenditure facilitated business operations without adding to the profit-earning apparatus, and the premature termination of the agreement further supported the revenue nature of the expenditure. The appeal was allowed, and the license fee was treated as a revenue deduction.