ACIT Vs Modi Revlon Pvt Ltd (ITAT Delhi)

ACIT Vs Modi Revlon Pvt Ltd (ITAT Delhi)- The original know-how license agreement was entered into on 14.1.1994 at the time of inception of business of the company and the payments of royalty under that agreement were made till August 2002 i.e. for a period of 7 years from the commencement of agreement as per the approval of the GOI. The payment of royalty in the year under assessment was made in terms of supplement agreement dated 16.9.2003. Hence, there is no question of any fresh input of know ­how/ technology and the payments are only in respect of continued use of brand name and patents owned by the foreign company. Hence no benefit of enduring nature is derived by assessee against these payments of royalty.

As per various clauses of know-how license agreement vis-à-vis supplement agreement dated 16.9.2003, the royalty payable as net sales of taxes the know-how has been provided by the contract manufacturer in terms of clause 4.01 of the agreement for limited purpose of manufacturing Revlon products only when passing on any property in the sale to the assessee. Obligations of the contract manufacturer were clearly defined in the agreement between the assessee company and the contract manufacturer, according to which obligation relating to royalty payment has not been passed on to the contract manufacturer. The entire benefit of the know-how was meant for manufacturing of the products to be supplied to the company and there was no obligation of contracting manufacturer to pay royalty to the licensor. Since the assessee company was enjoying the complete benefit of the know-how to run its business, the expenditure incurred every year on payment of royalty was revenue in nature and is very much a business expenditure. These expenditure cannot be classified as capital expenditure. From the record, we found that arrangement entered into by the assessee with KCPL and WMPL was for bona-fide commercial needs which cannot be tested against touchstone of tax avoidance. The royalty payment was made by the assessee in the normal course of its business which is revenue in nature, allowable u/s 37(1) of the Act. The know-how license was granted way back in 1994 in terms of an earlier agreement dated 22.7.1994 and the payment of royalty was in terms of the supplementary agreement dated 16.9.2003. Even as per para 12.01 of the agreement upon expiration or termination of this agreement, the licensee shall have no right to exploit or in any way to use the know-how and shall forthwith discontinue all use of the know-how and shall not thereafter use the know-how and so on. Thus, it is clear that the know-how has not been sold to the company and the licensor has an exclusive ownership of the know-how, therefore there is no reason to disallow the expenditure incurred on royalty payment which is revenue in nature, by treating the same as capital expenditure.

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘E’ DELHI

ITA No. 3738(Del)/2011
Assessment Year: 2008- 09

ASST. COMMISSIONER OF INCOME TAX

Vs

MODI REVLON PVT. LTD.

Dated: October 21, 2011

ORDER