INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Capital or revenue expenditure - Whether royalty payment for user of technical know-how and intellectual property rights along with the right to manufacture for a temporary period was required to be considered as revenue expenditure -

The assessee claimed deduction on account of payment of royalty made by it to H., Japan at the rate of 1% of the net factory selling price under section 37(1) of the Act. The aforesaid amount was paid for use of technical know-how and grant of rights for manufacture of Hitachi licence products, which included intellectual property. It was the case of the assessee that the aforesaid amount has been used for the purposes of business of the assessee and therefore, the claim for deduction under section 37(1) of the Act was permissible. Held: In instant case, perusal of the relevant clauses of the agreement, it was clear that the assessee was a joint venture company and under the agreement was granted non-transferable licence to manufacture/assemble the Hitachi licence products within the territory using technical know-how furnished by Hitachi and to sell or otherwise dispose of the Hitachi licence products. The products shall be sold only under the trade/brand name of Tata Hitachi. Even after expiry of the 11 years from the date of commercial production, the assessee was entitled to continue the manufacture and sale of Hitachi licence products for the aforesaid term of the agreement. Under the agreement, assessee had incurred an expenditure which gave it enduring benefit, therefore, the same was to be treated as capital expenditure. Tribunal rightly held that payment of royalty made by the assessee was a capital expenditure and was not a permissible deduction under section 37(1).

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2008-09

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