TaxTMI 
TaxTMI 
TaxTMI 
2009 (12) TMI 721
X X X X Extracts X X X X
X X X X Extracts X X X X
....and marketing of the Revlon products in the designated territory whereas RML was responsible for providing know-how, trade mark, etc. The assessee had entered into a technical know-how agreement with Revlon Mauritius Ltd. for the supply of technical knowhow to manufacture the goods. As per the said agreement, in consideration for the supply of know-how, the assessee shall pay every year royalty (net of taxes) at the rate of 5 per cent. on domestic sales and 8 per cent. on export sales. During the year, the assessee paid royalty of Rs. 4,73,06,822 to RML in pursuance of the grant of right to use the technical know-how. The Assessing Officer disallowed the assessee's claim of expenditure on account of royalty by observing that the royalty paid by the assessee to the know-how licensor is not an expenditure wholly and exclusively incurred for the business of the assessee, rather it is being incurred in part for the business of the sister concerns of the assessee, i.e., its contract manufacturer M/s. Kamakhya Cosmetics and Pharmaceuticals Pvt. Ltd., and its distributor M/s. Win Medicare Ltd. As such, the deduction of royalty is to be allowed in the hands of the assessee on the basis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties mutually decide to terminate the agreement." 6. According to clause 3 of the agreement, this supplement agreement is part of the original assessment except as modified and therefore, all the terms and conditions remained unchanged. The original know-how licence agreement was entered into on January 14, 1994 at the time of inception of business of the company and the payments of royalty under that agreement were made till August 2002, i.e., for a period of seven years from the commencement of agreement as per the approval of the Government of India. The payment of royalty in the year under assessment was made in terms of supplement agreement dated September 16, 2003. Hence, there is no question of any fresh input of know-how/technology and the payments are only in respect of continued use of brand name and patents owned by the foreign company. Hence no benefit of enduring nature is derived by the assessee against these payments of royalty. As per various clauses of know-how licence agreement vis-a-vis supplement agreement dated September 16, 2003, the royalty payable as net sales of taxes the know-how has been provided by the contract manufacturer in terms of clause 4.01 of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssioner of Income-tax (Appeals) has made a chart showing comparison of the facts of the case of Southern Switch Gear and the assessee's own facts and found out that only one fact, i.e., the assessee has an exclusive right to manufacture is common in both. The Commissioner of Income-tax (Appeals) has held that since one of the conditions mentioned in that order namely "the right to manufacture is exclusive in India" is also applicable in the case of the assessee, therefore small part of payment (5 per cent. of royalty) made by the assessee deserves to be capitalised as against capitalisation of 25 per cent. of royalty paid. 8. In terms of the agreement, there is no dispute to the fact that the assessee had been given only right to use know-how and the patents and at no point of time any property of enduring benefit has been transferred in favour of the assessee. In view of the decision of the hon'ble Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692, it can safely be concluded that where the assessee cannot assign or sub-license any part of the right obtained from the know-how, the payment made therefor cannot be termed as capital in nature. In the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....director, in the business of collaboration with RML. We found him as an instrument in negotiating the collaboration as representative of MMPL for which he himself gave his personal undertaking. We also found that Mr. U. K. Modi did not render any services in his capacity as director of the assessee-company and is not being paid any remuneration to work as a director. Sufficient evidence was produced before the Assessing Officer to indicate that MMPL was actively involved in the day-to-day activities of the assessee-company. MMPL has duly incorporated the consultancy charges in its income and paid due taxes thereon, it cannot be said that agreement was entered for siphoning off of income to the sister concern. In view of the decision of CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC), it is upon the assessee to decide what expenses are to be incurred or what is required for business purposes and it is not open to the Revenue to prescribe as to what expenses are to be incurred by the assessee. The categorical finding recorded by the Commissioner of Income-tax (Appeals) with regard to reasonableness of the consultancy charges paid has not been controverted by the learned ....