CIT v. Luwa India Ltd. - Taxpublishers.in

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The Tax Publishers2012 TaxPub(DT) 1645 (Karn-HC) : (2012) 205 TAXMAN 0342 INCOME TAX ACT, 1961 --Capital or revenue expenditure --Royalty As a part of licence fee--The assessee filed a return of income on 28-11-1997 showing the total income of Rs. 32,48,934 which was processed under section 143(1)(a). When the case was taken up for scrutiny under section 143(3), it was found that amount of Rs. 28,07,950 towards royalty which is a capital expenditure has been treated as revenue expenditure. The assessee appeared before the AO and contended that the amount of Rs. 28,07,950 has been paid as licence fee as per the agreement which has been entered into with M/s L AG Switzerland at 5% on sales net of cost of standard, as per the approval given by the Reserve Bank of India and since the said amount has been paid, based on the sales made, and is recurring in nature, the entire expenditure is revenue expenditure. The assessee relied upon certain decisions including the decision of Supreme court in CIT v. CIBA of India Ltd. () 69 ITR 692 (SC). However, the AO held that in view of the agreement entered into with M/s L, Switzerland, the payment of royalty would amount to capital expenditure as the company use the know-how and technology granted under the licence in the manufacture of the product and therefore, it was a capital expenditure in nature. On appeal the CIT(A) by order dated 5-7-2002 reversed the finding of the AO that an expenditure of Rs. 28,07,950 paid as licence fee to M/s. L Switzerland is a capital expenditure and cannot be called as a revenue expenditure and held that the expenditure of Rs. 28,07,950 paid as licence fee is a revenue expenditure. The ITAT, after considering the contentions of counsel appearing for the parties, by order dated 22-5-2006 allowed the cross-objections and dismissed the appeal holding that licence fee amounting to Rs. 28,07,950 is a revenue expenditure having regard to the terms of the agreement and by following the decision of the Supreme Court in CIT v. CIBA India Ltd. () 69 ITR 692 (SC). Held: Justified. It is clear that though certain decisions have been relied on to determine the question as to whether the expenditure incurred is capital or revenue, there is no universal formula that is laid down and finding would depend upon the facts of the given case and depend upon the terms of the agreement, method of payment and the valuation upon which payment is made and also on other material facts of the case. In the present case, the ITAT having regard to the contents of the agreement entered into by the assessee with M/s. L Switzerland had held that the licence that was granted does not confer any proprietory right in obtaining technical know how, the licence is granted as per the agreement subject to payment of royalty to make use of know how and technology. The royalty payable is depending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in CIBA India's case and also the decision in IAEC (Pumps) Ltd.. There is no merit in the contention of, counsel appearing for the appellant that since know how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royalty as referred to above and therefore, finding of the ITAT that the expenditure made towards royalty in a sum of Rs. 28,07,950 is revenue expenditure is justified and the substantial question of law is answered against the revenue and in favour of the assessee. [Para 8] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1645 (Karn-HC) : (2012) 205 TAXMAN 0342

INCOME TAX ACT, 1961

--Capital or revenue expenditure --Royalty As a part of licence fee--The assessee filed a return of income on 28-11-1997 showing the total income of Rs. 32,48,934 which was processed under section 143(1)(a). When the case was taken up for scrutiny under section 143(3), it was found that amount of Rs. 28,07,950 towards royalty which is a capital expenditure has been treated as revenue expenditure. The assessee appeared before the AO and contended that the amount of Rs. 28,07,950 has been paid as licence fee as per the agreement which has been entered into with M/s L AG Switzerland at 5% on sales net of cost of standard, as per the approval given by the Reserve Bank of India and since the said amount has been paid, based on the sales made, and is recurring in nature, the entire expenditure is revenue expenditure. The assessee relied upon certain decisions including the decision of Supreme court in CIT v. CIBA of India Ltd. () 69 ITR 692 (SC). However, the AO held that in view of the agreement entered into with M/s L, Switzerland, the payment of royalty would amount to capital expenditure as the company use the know-how and technology granted under the licence in the manufacture of the product and therefore, it was a capital expenditure in nature. On appeal the CIT(A) by order dated 5-7-2002 reversed the finding of the AO that an expenditure of Rs. 28,07,950 paid as licence fee to M/s. L Switzerland is a capital expenditure and cannot be called as a revenue expenditure and held that the expenditure of Rs. 28,07,950 paid as licence fee is a revenue expenditure. The ITAT, after considering the contentions of counsel appearing for the parties, by order dated 22-5-2006 allowed the cross-objections and dismissed the appeal holding that licence fee amounting to Rs. 28,07,950 is a revenue expenditure having regard to the terms of the agreement and by following the decision of the Supreme Court in CIT v. CIBA India Ltd. () 69 ITR 692 (SC). Held: Justified.

It is clear that though certain decisions have been relied on to determine the question as to whether the expenditure incurred is capital or revenue, there is no universal formula that is laid down and finding would depend upon the facts of the given case and depend upon the terms of the agreement, method of payment and the valuation upon which payment is made and also on other material facts of the case. In the present case, the ITAT having regard to the contents of the agreement entered into by the assessee with M/s. L Switzerland had held that the licence that was granted does not confer any proprietory right in obtaining technical know how, the licence is granted as per the agreement subject to payment of royalty to make use of know how and technology. The royalty payable is depending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in CIBA India's case and also the decision in IAEC (Pumps) Ltd.. There is no merit in the contention of, counsel appearing for the appellant that since know how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royalty as referred to above and therefore, finding of the ITAT that the expenditure made towards royalty in a sum of Rs. 28,07,950 is revenue expenditure is justified and the substantial question of law is answered against the revenue and in favour of the assessee. [Para 8]