Royalty paid for certain rights, which are not in the nature of “make available,” can be charged to revenue account
The taxpayer was a wholly owned subsidiary of Denso Thermal Systems, Italy. The taxpayer was engaged in the business of manufacturing certain automobile products and selling the same in India and abroad. For the impugned assessment year, the taxpayer claimed that the royalty paid to its parent company as revenue expenditure. After perusing the details called for, the AO, relying on the decision of CIT vs. Southern Switchgear Ltd. 148 ITR 272 (Mad) held 25% of the royalty claimed as capital expenditure and disallowed the same. However, perusing the technical collaboration agreement entered by the taxpayer the CIT (A) deleted the addition made on account of 25% of royalty expenditure. The revenue authority preferred an appeal before the Tribunal.
Regarding the terms of the agreement, the Tribunal held that, in the current case, the terms of the agreement was for 10 years and upon completion of the term, the rights, technical know-how and confidential information were to revert to the licensor and the respondent will not have further right to use the property and know-how. Since the respondent was granted just a license to use the technology in the product manufactured by it and was never made the owner of such technology, he could not be said to have acquired any capital asset. Hence no part of the expenditure could be capitalized. The Tribunal placed reliance on the decisions of CIT vs. Ciba of India Ltd. (69 ITR 672) (SC) and Sriram Pistons & Ring Ltd. (171 Taxman 81) (Del). Thus, in view of the above, the Tribunal confirmed the order of CIT(A).
Decided by: ITAT – Delhi, In the case of Denso Faridabad Pvt. Ltd.