TaxTMI 
TaxTMI 
2016 (3) TMI 368
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....,10,665/- & Rs. 78,89,750/- under the head 'royalty' paid to Sango Co. Ltd, Japan and Emcon Technologies, Germany for assessment year 2008-09 & 2009-10 respectively. This royalty was paid for using technical and engineering instruction knowhow and the copy right materials relating to manufacture, assembly and sale & distribution of products. The assessee claimed the entire royalty payments as revenue expenses and debited to P&L account. The AO treated the said royalty payments as capital expenditure and disallowed the same. However, the AO allowed depreciation @ 25% on the royalty payments, treating them as intangible assets. On appeal, the CIT(A) confirmed the action of the AO. Against this, the assessee is in appeal before us. 4. The ld.A.R submitted before us that the royalty was paid on the basis of a particular percentage of the sales made in each year. Hence, it amounts to a revenue expenditure and allowable in its entirety. The ld.A.R further submitted that only the one time up-front payment of royalty at the beginning of the agreement, if any paid, is to be considered as capital expenditure. Its payment for royalty is for the use of technical knowhow etc. from year to ye....
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....ture only. 6. The ld.D.R submitted that there could be two types of royalty payments. The first category is a 'one time up-front' payment of royalty at the beginning of the agreement. This category forms a capital expenditure because the benefits of the payments accrue to the assessee for a number of years. The second category is 'annual payment', which is normally calculated at a fixed percentage of the assessee's manufactures and sale of the items. He further emphaised that the present case before us, the royalty payment falls under he second category i.e. "annual payment" calculated at a fixed percentage of the assessee's manufacture and sale of the items. The AO relying on the decision of the Hon'ble Supreme Court in the case of M/s.Souther Switch Gea Ltd., (232 ITR 359) treated this as a capital expenditure. Consequent to the amendment to the depreciation schedule, w.e.f. 01.04.1998, all the intangibles have been grouped under the 'intangible block of assets' entitled for depreciation @ 25%. Hence, the royalty payments, whose benefits are enduring in nature, fall under the category of capital expenses of 'intangible block of assets" of 25% depreciation. Further he relied in....
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....parties and perused the material on record. In our opinion, the royalty payment is based on the percentage of quantum sales and it is an annual charge to be considered as business expenditure in respect of assessment year 2007-08 as held by Co-ordinate Bench in the case of India Nippon Electricals Ltd., cited supra. Further, the judgment of Judicial High Court in the case of M/s.Southern Switch Gear Ltd (148 ITR 272) cannot be applied to the facts of the case as in that case. It is a lump sum payment towards royalty and as such in that circumstance it was held that it is an capital expenditure and depreciation was granted. Accordingly, this ground of the assessee is allowed. 8. The second ground in A.Y 2009-10 is with regard to confirm the disallowance of the capital work in progress written off. 9. The brief facts of the case relating to this ground are that the assessee was constructing a factory premises at Singur in West Bengal. Consequent to the unrest and protests by the local people, the assessee had abandoned the said project and claimed the expenditure of Rs. 89,89,768/- as write off. The AO disallowed the assessee's claim of capital work-in-progress written off. On ....
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....ct to the expenses which are preliminary expenses in nature. In such cases, if the project fails to take off or abandoned, the said expenses are to be allowed as revenue expenditure. These expenses in normal course, if the projects materialize, are to be allowed as amortization over a period of five years from the commencement of the business. However, if the project fails to materialize, as held by the judicial pronouncements, the expenses are to be allowed as revenue expenditure in the year in which the project fails to take off or abandoned. Whereas, in the present case, the capital work in progress, which was claimed as written off, is not in the nature of preliminary expense and hence, the case laws relied by the assessee are not applicable to the facts of the case. He further pointed out that the capital expenses including the work-in-progress, if written off, even in the cases of abandoned projects, etc. cannot be allowed as an allowable deduction. Therefore, he pleaded that the claim of the assessee's deduction on account of capital work-in - progress written off is not allowable. 12. We have heard both the parties and perused the material on record. In this case, assess....