Tribunal rules royalty expenditure as revenue, rejects capital treatment for non-exclusive technology use

The Tribunal held that the royalty expenditure paid by the assessee for the non-exclusive use of technology was revenue in nature. The Department's argument that the expenditure should be treated as capital due to enduring benefits was rejected. The Tribunal emphasized the recurring nature of the royalty payments and the absence of exclusive rights or acquisition of technical know-how. Citing precedents, the Tribunal dismissed the Department's appeals, allowing the royalty expenditure as revenue expenditure. All Department appeals were dismissed, affirming the revenue nature of the royalty expenditure.

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Issues Involved:
1. Nature of Royalty Expenditure: Whether the royalty expenditure paid by the assessee to FCC Co. Ltd., Japan, is capital or revenue in nature.

Issue-wise Detailed Analysis:

Nature of Royalty Expenditure:

Facts and Background:
The assessee company, engaged in manufacturing and selling clutch assemblies for vehicles, entered into a license agreement with FCC Co. Ltd., Japan, granting non-exclusive and non-transferable rights to use Industrial Property Rights (IPRs) and technical information for manufacturing and selling products in India. The royalty was paid at 5% of the value addition made by the assessee.

Assessment Proceedings:
The Assessing Officer (AO) treated the royalty expenditure as capital in nature, relying on the Supreme Court judgment in Southern Switchgear Ltd vs CIT. The AO disallowed 75% of the total royalty expenditure for the assessment years 2009-10 to 2015-16, considering it as capital expenditure.

CIT(A) Decision:
The CIT(A) deleted the addition made by the AO, holding the royalty expenditure as revenue in nature. The CIT(A) relied on its earlier order for AY 2005-06, where it was held that the royalty paid for using non-exclusive, non-transferable technical know-how was recurring expenditure and thus revenue in nature. The CIT(A) also considered judgments from the Delhi High Court, including CIT vs. JK Synthetics Ltd. and CIT vs. Shri Ram Pistons & Rings Ltd., which supported the assessee's claim.

Department's Argument:
The Department argued that the royalty expenditure should be treated as capital in nature due to the enduring benefit arising from the License Agreement. They contended that the rights granted were effectively exclusive due to the licensor's 50% stake in the assessee, and the agreement's termination clause implied an enduring benefit.

Assessee's Argument:
The assessee argued that the royalty expenditure was for non-exclusive, non-transferable use of technical know-how, and thus revenue in nature. They cited various judgments, including Climate Systems India Ltd. v. CIT and CIT vs. Hero Honda Motors Ltd., where similar royalty payments were held as revenue expenditure.

Tribunal's Analysis:
The Tribunal noted that the royalty paid was recurring and based on sales, with no exclusive rights or acquisition of technical know-how. The Tribunal distinguished the case from Southern Switchgear Ltd., highlighting that the agreement in the present case did not confer any exclusive right or enduring benefit. The Tribunal referred to the Delhi High Court judgments in Climate Systems India Ltd. v. CIT and CIT vs. Hero Honda Motors Ltd., which supported treating such royalty payments as revenue expenditure.

Conclusion:
The Tribunal held that the royalty expenditure was revenue in nature, as it was for the use of technology without any exclusive right or acquisition of know-how. The appeals of the Department were dismissed, and the royalty expenditure was allowed as revenue expenditure.

Order:
All appeals of the Department were dismissed, and the royalty expenditure was held to be revenue in nature. The order was pronounced in the open court on 30/07/2021.

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