1990 (6) TMI 102 - AT - Income Tax

ITAT deems royalty payment as revenue expenditure, allowing deduction for business income

The ITAT concluded that the royalty payment made by the assessee was deemed as revenue expenditure and hence allowable as a deduction in computing ... Foreign Company, Revenue Expenditure Issues Involved:1. Nature of royalty payment: capital or revenue expenditure.2. Interpretation of collaboration agreement and its clauses.3. Applicability of judicial precedents.4. Obsolescence allowance.Issue-wise Detailed Analysis:1. Nature of Royalty Payment: Capital or Revenue ExpenditureThe primary issue revolves around whether the royalty payment made by the assessee to the foreign company should be classified as capital expenditure or revenue expenditure. The assessing officer initially rejected the assessee's claim, arguing that the expenditure was for acquiring a capital asset in the form of technical know-how. The CIT(A) upheld this view, distinguishing the case from other precedents by noting that the know-how was obtained at the business's inception. However, the ITAT overturned this, concluding that the assessee did not acquire an asset of enduring nature. The payment was for technical documents, assistance, and know-how, which did not constitute an absolute transfer of assets. Therefore, the royalty payment was deemed revenue expenditure and allowable as a deduction.2. Interpretation of Collaboration Agreement and Its ClausesThe collaboration agreement between the assessee and the foreign company included several critical clauses. Article 2.7 acknowledged JCB's exclusive ownership of trademarks and trade names. Article 2.8 stated that technical documents and information supplied would remain JCB's property during the agreement's subsistence and become the assessee's property upon expiration, subject to restrictions. Article 6 imposed a secrecy obligation on the assessee. Article 7 allowed sublicensing with JCB's approval, and Article 10.2 linked the use of patents to JCB's shareholding. These clauses collectively indicated that the foreign company did not transfer the technical know-how absolutely to the assessee, supporting the view that the royalty payment was revenue expenditure.3. Applicability of Judicial PrecedentsThe assessee cited several judicial precedents, including decisions from the Delhi High Court and the Supreme Court, to argue that payments for technical know-how should be treated as revenue expenditure. The ITAT found these precedents applicable, noting that in cases like Shriram Refrigeration Industries Ltd. and Triveni Engg. Works Ltd., similar payments were held to be on revenue account. The ITAT also referred to the Supreme Court's decision in Alembic Chemical Works Co. Ltd., which emphasized the need for flexibility in distinguishing between capital and revenue expenditure, especially in rapidly advancing fields like technology.4. Obsolescence AllowanceThe ITAT agreed with the learned Departmental Representative that the obsolescence allowance should be allowed in the subsequent assessment year. The judgment included a direction to ensure this allowance is appropriately accounted for in future assessments.Conclusion:The ITAT concluded that the royalty payment made by the assessee was on revenue account and thus allowable as a deduction in computing the income from business. The appeal of the assessee was partly allowed, while the appeal of the revenue was dismissed. The judgment emphasized the importance of interpreting collaboration agreements and judicial precedents in determining the nature of such payments.