TaxTMI 
TaxTMI 
2010 (2) TMI 770
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....nt of the Hon'ble Supreme Court in the case of Southern Switchgear Ltd. vs. CIT 232 ITR 359, relied upon by the Assessing Officer is squarely applicable to the assessee's case." 3. In this case, original assessment was completed on 09.02.2004 u/s 143(3) by the A.O. determining total income at Rs. 59,09,449/-. Thereafter, the case was reopened u/s 147, and notice u/s 148 dated 27.03.2008 was issued and served upon the assessee. It was noticed by the A.O. that assessee company had debited Rs. 131.81 lakhs in the profit and loss account on account of royalty paid to a foreign company. The assessee was asked by the A.O. to explain as to why 25% of the royalty paid should not be treated as capital expenditure in the light of the decision of Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. vs. CIT (1997) 232 ITR 359 (SC). In reply thereto, the assessee submitted that the facts of the case of Southern Switch Gear Ltd. vs. CIT (supra) are distinguishable from the assessee's case. In the case of Southern Switchgear Ltd. (supra), payment was made in lump sum over a period of five years for the use of technical know-how and aid to manufacture switchgear for automotives....
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....he company is working on the old power plants whose performance has gradually reduced over the period of time. Each old plant has different working performance parameters conditions and status. 2. Nature of royalty payment The payment was made in lump sum over a period of five years for obtaining the technology to set up a plant to aid to manufacture switchgear for automotives. The payment is based on the net sales price @ 1.25% for Siemens and 0.25% for BHEL. 3. Terms of Agreement a) For SSL, the agreement clearly specified that the rights given to the assessee pursuant to the agreement are exclusive rights and would be available even after the termination of the agreement. a) Para 3.1 and 3.2 clearly states that the license granted by SAG for use of information is nonexclusive and nontransferable and the license does not include the right to grant sublicense to any third party. b) The company could use the technical drawings and designs etc. in future for manufacturing even after the termination of the agreement. b) Para 2.3 of the agreement clearly states that no information or documentation shall be rendered about the design and the manufacture of compon....
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....bove and, therefore, they need not to be repeated here again. 12. We have considered the rival contention of both the parties and have carefully gone through the orders of the authorities below. We have carefully perused the various documents and papers placed in the paper book filed by the assessee. 13. Various decisions cited at the Bar have been deliberated upon. 14. The assessee company is in the business of renovation and modernization of old power plants since its incorporation in May, 1997. Till financial year 2000-01, the assessee paid royalty in pursuance of the foreign collaboration agreement entered into between the assessee company, BHEL and Siemens Aktengesellschaft, Germany. The agreement was effective from/ on 1st September, 1997. The assessee company debited Rs. 131.81 lakhs in the profit and loss account on account of royalty paid on the basis of net sales/turnover. The copy of foreign collaboration agreement between assessee, BHEL and Siemens, Germany effective from 1st September, 1997 is placed at pages 12 to 30 of the paper book filed by the assessee. As per this agreement, the assessee company is a joint venture of BHEL and Siemens....
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....r the business of Plant Performance Improvement, whether oral or in recorded form, whether patented or not, which are available at the department KWU FS of the KWU-Group of Siemens and which Siemens has the right and the power to dispose of." 14.2 The nature of the services are Technology Transfer to be rendered by Siemens to JVC and grant of license, which are detailed in clause 2 and 3 of the agreement. In clause 2, it is provided that Siemens shall provide transmission of information and transmission of documentation to JVC. It is also provided therein that Siemens shall train joint venture company's experts in their facilities in Germany and at sites in order to familiarise such experts with the information and with the know-how incorporated in the documentation. The Siemens shall also delegate its experts to the facilities of JVC in order to asset the personnel of JVC in activities for plant performance improvement upon request of JVC, and Siemens is also prepared to provide further technical assistance against reasonable remunerations to be paid by JVC and upon request of JVC. It was also agreed that Siemens shall grant to JVC the non-exclusive, non-transferable lic....
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....nd in consideration of the right granted by Siemens, the joint venture company shall paid to Siemens royalty at 1.25% of the net sale price but in no event exceeding Rs. 2.5 crores in a year during the first four years, and at the rate of 1% of the net sale price but in no event exceeding Rs. 3 crores in a year after the first four years. Clause 7 of the agreement provides that for the term of the agreement and five years thereafter JVC shall keep confidential all information and documentation furnished by Siemens under the agreement subject to the certain exceptions about any information of public knowledge or any information received from third party without any secrecy information. The agreement was terminable forthwith if other party fails to perform his obligation provide under the agreement. 14.7 After expiration of the agreement, JVC will be free to carry out plant performance improvement in the agreed market without payment of any remuneration and fees whatsoever using the information and patent of Siemens which are furnished/ granted under the agreement. 15. In the light of the aforesaid conditions of the agreement, we are required to decide this issue ....
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..... We are of the opinion that this finding of the Commissioner of Income-tax (Appeals), as approved by the Income-tax Appellate Tribunal, is a finding of the fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year. 5. In CIT vs. J.K. Synthetics Ltd. (2009) 309 ITR 371 (Delhi), after elaborately discussing the entire case law on the subject, the court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principles enumerated therein reads as under:- "(v) expenditure incurred for grant of licence which accords'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:- (a) the tenure of the license, (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the pro....
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....any lump sum of royalty and it was in these circumstances the same was treated as capital expenditure and the Tribunal had disallowed 25 per cent thereof. In the present case, as pointed out above, royalty is to be paid on the quantity of the goods produced, calculating per piece of the said goods produced. Therefore, the Tribunal rightly held that the aforesaid judgment not applicable to the facts of the present case." 20. The aforesaid decision of Delhi High Court in the case of CIT vs. Sharda Motors Industrial Ltd. (supra) has been followed by the same High Court in the later decision in the case of Climate Systems India Ltd. vs. CIT (2009) 319 ITR 113 (Delhi) where it has been held as under:- (extracted from head note) "Held, allowing the appeal, that under the agreement, payments were to be made by the assessee in two parts: a lump sum fee for transfer of technology (which the assessee had admitted as being of capital nature) and royalty payment in consideration of providing technology services. The payment of royalty depended on the quantum of domestic as well as export sales which would decrease or increase every year depending upon the decrease....