TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 624
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....CIT(A) erred in sustaining the disallowance of Rs. 2822639/- as capital expenditure, being 25% of royalty paid." 3. Brief facts leading to the above issue are that the assessee company is engaged in the business of manufacturing of cosmetic and dental care products. The assessee company had two technical collaboration agreements with licence to use trade mark, copy right and knowhow of the foreign collaborators namely Beirsdorf AG, Germany (BDF) and Dr. Wild & Co., Switzerland vide agreement dated 14.09.1995 along with supplementary agreement dated 01.04.1996 and 14.07.2003. Both the agreements contained various restricting and prohibitive covenants as to the licence to use trade mark, knowhow etc. The agreement with BDF provides for royalty payment @ 5% on domestic sales and was approved by Ministry of Commerce and Industries, Department of Industrial Policy and Promotion, Govt. of India vide letter dated 12.06.2001 and also by Reserve Bank of India, Exchange Control Deptt.'s letter dated 02.07.2001. Agreement with Dr. Wild & Co. provides for royalty payment of 5 and 2.5% of domestic sales as per different product classification and covered by automatic approval as liberalised by....
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....too under strict terms and conditions and not for setting up any factory. After the termination of agreement in both the cases, the use of knowhow or trademark was not available to the assessee. This fact is clear from the technical collaboration and licensing agreement with both the parties, which almost identically worded and we take the language from the technical collaboration and licensing agreement with Dr. Wild & Co. The relevant clause in Article-6 of the agreement vide 6.1 reads as under: "6.1. The patent and know-how licensed under this Agreement shall be and remain the property of the Licenser and the Licensee acknowledges and agrees that the Licenser shall at all times continue to be the owner thereof unless the Licenser informs the Licensee in writing that the ownership thereof has changed." Further, 6.4 and 7.1 of the agreement read as under: "6.4. The Licensee shall not be entitled to make any copies of the documents comprising the technical knowhow and the improvements without prior written consent of the Licenser." "7.1. Neither Party shall assign any of its rights and obligations contained in this Agreement or any part thereof to any other party without the p....
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....ing of the other. 4.3. Either, party shall have the right to terminate this agreement by giving 90 days written notice to the other party, if that other party voluntarily or otherwise commits a main breach under the terms or conditions of this agreement, provided such breach is not remedied within the said notice period including the recovery of damages caused. 4.5. Immediately upon expiry or termination for any cause hereof or any or all incenses, rights or permissions herein granted, the Licensee shall discontinue any and every use whatsoever of the said Trademarks in connection with any goods (including the said products), services or business or trade as also of any other word, name logo, device in any alphabet, script or language so vaguely similar in sound, appearance or meaning to the said Trademarks and words, names logos, device in any alphabet, script or language used in conjunction with the said Trademarks as to be likely to cause confusion or deception or which are closely similar or detract or adversely affect the right title or interest of the Licenser in or the said Trademarks in any manner whatsoever. Any registration of the Licensee as registered user of the said....
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....of the agreement. It was also provided in clause IV of the agreement that Ciba Pharma could neither assign the benefit and the obligations of the agreement without the written consent of Ciba Basle nor could Ciba Pharma grant any sublicence under the patents and/or trade marks of Ciba Basle without its previous written consent. On these broad terms of the agreement, the Supreme Court held that the assessee did not become entitled exclusively even for the period of the agreement to the patent and trade mark of the Swiss company. It had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. In that sense, the assessee was a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade marks of that company. The assessee merely had access to the technical knowledge of the assessee for the purpose of running its business. The Supreme Court held that there was no attempt on the part of the Swiss company to part with the technical knowledge absolutely in favour of the assessee inasmuch as the secret processes were not sold by the Swiss company to the assessee....
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....sessee as soon as they are received. Clause 9 provided that copyright in such drawings, patterns and jigs shall, however, remain vested with the British company when the assessee is having a licence to use the same for the purpose of the agreement only. The Division Bench considered the judgment of the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692 and noted that the question for consideration was whether the agreement resulted in an absolute sale of know-how and whether the payment was for the use of know-how provided by the British company to the assessee. The Division Bench considered the use of the expression "agreed to sell outright" occurring in the agreement as well as some similar words such as "sold", "absolute property", "deemed to be the property" in other parts of the agreement and after observing the use of these expressions, the Division Bench noted that on an examination of the agreement, it was clear that it was valid for only 10 years and it could be terminated earlier ; it was limited to the Republic of India though exclusive to the assessee ; though the data, documents and dies, etc. were said to be the absolute property of the assessee, yet the copyright....
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....swered the question by coming to the conclusion that the drawings/designs etc. were actually "plant" as defined under section 43(3) of the Act and would therefore, be a depreciable asset. As already noted above, this is not the question before us inasmuch as it is not an admitted fact that the expenditure incurred by the assessee was of a capital nature. On the contrary, what we have to answer is whether the expenditure incurred was of a capital nature or of a revenue nature unlike the factual matrix in Scientific Engineering House P. Ltd. [1986] 157 ITR 86 (SC)." As the issue is squarely covered by the decision of Hon'ble Delhi High Court, wherein after considering various case laws the issue is decided, the facts being identical in the present case before us, we allow the claim of assessee. This issue of assessee's appeal is allowed. 5. Now, we take up ITA No. 912/K/2011. The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of royalty paid as capital expenditure. For this, assessee has raised following ground: "Disallowance of 25% of royalty paid as capital expenditure: For that on the facts and in the circumstances of the cas....