Payment of royalty for technical knowhow as per TCA Agreement allowable as revenue expenditure

Brief of the case:

Revenue challenged the order passed by ITAT which confirmed the order of CIT (A) that expenditure incurred i.e. payment of royalty for technical knowhow in terms of Technical Collaboration Agreement (TCA Agreement) is an allowable expenditure as no benefit was obtained by the Assessee for the period beyond the relevant assessment years. In an another issue High court confirmed the action of ITAT that assessee can claim depreciation UPS and computer peripheral used more than 180 days in previous year in absence of any explanation by revenue.

Facts of the case:

• Assessee entered into a Technical Collaboration Agreement (TCA) with SMCL, Japan in 1997.
• The TCA notes that there are three broad kinds of services in which the Licensor and the Licensee are engaged, i.e. provision of construction management services, turnkey contract service and the consultancy services including project management.
• Under the various clauses of agreement licensor was agreed to provide various services and technical assistance from time to time and it was agreed to pay a lump sum amount of One Million $ over a period of 10 years.
• It was further agreed to be given exclusive selling/servicing rights to licensee for which the Licensee was to pay royalty @ 5% for the contract services provided by the Licensee for the domestic market and 8% for export markets.
• AO disallowed the amount paid by assessee to SMCL on account of royalty and fee for technical assistance by holding capital in nature.

Contention of the revenue:

• The essential business of the Assessee was entirely dependent on the technical knowhow provided by SMCL and the benefit to the Assessee was of an enduring nature, the expenditure incurred should be treated as capital expenditure.

Contention of the assessee:

• The expenses were incurred as per agreement and are purely for the purpose of business and should be allowable as revenue expenditure.

Held by the CIT (A):

• CIT (Appeals) concluded that by incurring the said expenditure, no benefit was obtained by the Assessee for the period beyond the relevant assessment years. It was a periodical payment linked to the annual turnover and did not constitute capital expenditure for the reason that it was incurred for obtaining selling/servicing rights under Clause 6 of the Agreement and, therefore, did not provide any benefit of enduring nature to the Assessee.

Held by ITAT:

• By making payment in terms of TCA, the Assessee did not become the owner of the technical knowhow. The benefit to it was not of an enduring nature.

Held by the Court:

• A perusal of the TCA shows that the payment by the Assessee to SMCL is for the technical knowhow given to the Assessee as a Licensee. Although the payment is spread over a period of 10 years, it does not make the Assessee the owner of the technical knowhow.
• The very nature of the license agreement is that it is not of a permanent nature. The view taken by the CIT (Appeals), and concurred with by the ITAT, cannot in the circumstances be said to be improbable or contrary to the settled legal position.

NF