INCOME TAX ACT, 1961

Section 37(1)

Capital or revenue expenditure - Royalty paid under running agreement towards right to use know-how - -

Assessee entered into an agreement for use of technical know-how with one 'F'. Under said agreement, non-transferable and exclusive licence to technical know-how in India was acquired by assessee. In terms of the agreement, assessee was paying royalty at the rate of 1.8% of net of selling price of the products sold by the company. AO disallowed 5% of such royalty payment holding that it was on capital account. Held: It was not in dispute that it was running agreement under which royalty at fixed rate of 1.8% of total sales was paid by the assessee. It was not in dispute that it was running agreement under which royalty at fixed rate of 1.8% of total sale was paid by the assessee. The payment was not for acquiring any asset of enduring nature nor any asset had been acquired by assessee by making this payment. 'F' had only transferred the right and exclusive license to use the know-how to sell product in India and outside India, except European countries. This could not be a ground for holding that it was an expenditure on capital account. Therefore, disallowance was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2006-07 & 2007-08

INCOME TAX ACT, 1961

Section 14A Rule 8D

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