Case Number: ITA 1502/DEL/2019
Appellant: ACIT, Circle-9(1), New Delhi
Respondent: FCC Clutch India P.Ltd, Gurgaon
Assessment Year: 2012-2013
Result: 2012-2013
Case Filed On: 2019-02-22
Order Type: Final Tribunal Order
Date of Order: 2021-07-30
Pronounced On: 2021-07-30
Bench: Delhi Bench “B”, New Delhi
Members: Shri R.K. Panda (Accountant Member) and Shri Amit Shukla (Judicial Member)
This case involves the appeal filed by the ACIT, Circle-9(1), New Delhi against the order of the Commissioner of Income-Tax (Appeals)-3, New Delhi, for the assessment year 2012-2013. The primary grievance is the deletion of the disallowance made by the Assessing Officer (AO) treating the royalty expenditure as capital in nature instead of revenue.
The respondent, FCC Clutch India P.Ltd, Gurgaon, is engaged in the business of manufacturing and selling clutch assemblies for two-wheelers and four-wheelers. The company had entered into a license agreement with F.C.C. Co. Ltd., Japan, granting it the non-exclusive and non-transferable right to use industrial property rights (IPRs) and technical information to manufacture and sell products in India.
The AO disallowed the royalty expenditure, treating it as capital in nature based on the enduring benefit to the assessee. The royalty disallowed for the assessment year 2012-13 amounted to Rs. 16,90,72,648. The CIT(A) allowed the appeal of the assessee, treating the expenditure as revenue in nature. The ACIT, Circle-9(1), New Delhi, appealed against this decision to the Income Tax Appellate Tribunal (ITAT).
During the hearing on 22/07/2021, the appellant was represented by Ms. Nidhi Srivastava, CIT (DR), and Shri Mahesh Thakur, Sr. DR, while the respondent was represented by Shri K.M. Gupta, Advocate, Ms. Shruti Khimta, Advocate, and Ms. Saloni Shital, AR.
The primary issue before the Tribunal was whether the royalty payment to FCC Co. Ltd., Japan, was a capital or revenue expenditure. The AO contended that the royalty payment resulted in an enduring benefit to the assessee, thus making it capital in nature. The CIT(A) had allowed the appeal of the assessee, treating the royalty expenditure as revenue in nature, which was challenged by the Department.
The Tribunal examined the license agreement, which granted the assessee a non-exclusive and non-transferable right to use the IPRs and technical information. The Tribunal noted that the royalty payment was a recurring expenditure paid for the use of technology for manufacturing and selling products and did not confer any exclusive or enduring right to the assessee.
The Tribunal referred to several judgments, including the Delhi High Court’s decisions in Climate Systems India Ltd. v. CIT and CIT v. Sharda Motor Industrial Ltd., which held that royalty payments for the use of technology are revenue expenditures. The Tribunal also distinguished the case from the Supreme Court’s judgment in Southern Switchgear Ltd. v. CIT, which involved an exclusive and enduring right to use the technical know-how.
In view of the findings, the Tribunal upheld the CIT(A)’s decision and dismissed the Department’s appeal. The Tribunal held that the royalty payment was a revenue expenditure and was allowable as a deduction under the Income Tax Act.
In the result, the appeal by the ACIT, Circle-9(1), New Delhi, was dismissed. The Tribunal emphasized that royalty payments for non-exclusive, non-transferable rights to use technical information for manufacturing purposes are revenue expenditures and should be treated accordingly.
Decision: Appeal dismissed.
Signed by: Shri R.K. Panda (Accountant Member) and Shri Amit Shukla (Judicial Member)
Date: 30.07.2021
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