Maruti Suzuki India Ltd. Vs ACIT (ITAT Delhi)
The royalty paid to Suzuki Motor Corporation Japan by Maruti Suzuki India Ltd. for the use of licensed information held to be revenue expenditure
An expenditure whether pertains to capital or a revenue one has remained controversial in many cases. Help in resolving this issue is taken from the decided cases, on the facts and circumstances of the particular case with reference to Income Tax Act. Recently, in Maruti Suzuki India Ltd. vs. ACIT [ITA No.-6021/Del/2012, decided on 09.11.2017], amongst 19 grounds raised in the appeal before Delhi ITAT, one of the ground was in respect to the disallowance of Rs.192.77 Crores royalty paid to Suzuki Motor Corporation, Japan (‘SMC’), by Maruti Suzuki India Limited. In the case, the assessee paid royalty of Rs.495,15,40,443/- to Suzuki Motor Corporation, Japan (‘SMC’) for use of licensed information for the engineering, design and development, manufacture, testing, quality control, sale and after sales service of products and parts, but the Assessing Officer(AO), in the assessment order, had held that inasmuch as the life cycle of a car was only 5 years whereas the license agreement was for 10 years, extendable by 5 years and even thereafter the assessee could produce the said model of car, and the license agreement led to the assessee setting up a new factory based on new technology, and for these reasons the assessee had enduring benefit as such royalty paid by the assessee was capital in nature, and consequently, held that the entire royalty was disallowable. On this premise, basing on the adjustment of Rs.237.24 crores, made by TPO the AO had computed the disallowance out of royalty payments to a tune of Rs. 192.77 Cr.
The Authorised Representative of the assessee submitted that the AO failed to appreciate the fact that the nature and purpose for which the royalty had been paid to SMC was only the use of licensed information for the engineering, design and development, manufacture, testing, quality control, sale and after sales service of products and parts, and as per clause 7.01 of the agreement the duration of the agreement has been specified as 10 years and vide clause 7.04 of the agreement it was subject to termination at earlier date for breach. He submitted that as evidenced by clause 2.02 of the agreement SMC did not transfer to MSIL any specific patents or copyrights or other secret or protected information or knowhow so as to make MSIL a proprietor of the same or so as to enable MSIL to exercise proprietary rights such as unrestricted rights of transfer to third party, either by way or assignment or license.
According to AR in order to determine the nature of the royalty payment, whether capital or revenue, what was material was the underlying purpose for which payment was made and not the tenure or its extendibility or the life cycle of the product that was manufactured with the help of the technology that was accessed from SMC. If the payment was for use of technical knowhow, simplicitor, then the payment had to be regarded as revenue, irrespective of the tenure for which permission was granted for such use. Since in the present case, under the License Agreement, the assessee was merely granted permission to access the technical knowhow for the limited purpose of using the technology relating to the new models during the currency of the agreement and the proprietary rights for the know-how and the intellectual property rights in relation thereto continue to be owned by SMC alone, the payment was undoubtedly revenue in nature.
While placing reliance on Circular No. 21 of 1969 issued by CBDT, AR argued that if in terms of the Agreement, only a license was obtained for user of technical knowledge from a foreign participant for a limited period together with or without the right to use the patents and trademarks of the foreign party, the payment would not bring into existence an asset of enduring advantage to the Indian party. He further submitted that while following the aforesaid Circular, the jurisdictional Delhi High Court in case of CIT v. Lumax Industries Limited: 173 Taxman 390 held that similar royalty payment was allowable as revenue deduction.
The AR submitted that in a host of following decisions, the issue of allowability of royalty payments as revenue expenditure was covered in favour of the assessee company:
