Case Number: ITA 443/DEL/2019
Appellant: ACIT, Circle-9(1), New Delhi
Respondent: FCC Clutch India Pvt. Ltd., Gurgaon
Assessment Year: 2013-14
Case Filed On: 2019-01-22
Order Type: Final Tribunal Order
Date of Order: 2021-07-30
Pronounced On: 2021-07-30
The case of ACIT vs FCC Clutch India Pvt. Ltd. revolves around the disallowance of royalty expenses claimed by the assessee, FCC Clutch India Pvt. Ltd., for the assessment year 2013-14. The Assistant Commissioner of Income Tax (ACIT), Circle-9(1), New Delhi, appealed against the decision of the Commissioner of Income Tax (Appeals)-3, New Delhi, which treated the royalty expenses as revenue expenditure. The main contention was whether these expenses should be considered as capital in nature.
The assessee company, FCC Clutch India Pvt. Ltd., engaged in the manufacturing and selling of clutch assemblies for two-wheelers and four-wheelers, entered into a license agreement with FCC Co. Ltd., Japan. The agreement granted the assessee a non-exclusive and non-transferable right to use the Industrial Property Rights (IPRs) and technical information for manufacturing and selling its products in India. For this right, the assessee agreed to pay a royalty calculated as 5% of the value addition made by the assessee.
During the assessment proceedings for the assessment year 2013-14, the Assessing Officer (AO) treated the royalty payments as capital expenditure, relying on the Supreme Court’s judgment in Southern Switchgear Ltd. vs CIT. The AO’s decision was based on the assumption that the royalty payments provided an enduring benefit to the assessee.
The assessee appealed against the AO’s decision to the CIT(A), who ruled in favor of the assessee, treating the royalty expenses as revenue in nature. The CIT(A) relied on the consistent approach taken in previous years, where similar disallowances were deleted. The CIT(A) also considered the Delhi High Court’s judgments in cases like CIT vs Sharda Motor Industrial Ltd. and CIT vs Hero Honda Motors Ltd., which supported the treatment of such royalty payments as revenue expenditure.
Aggrieved by the CIT(A)’s decision, the Department appealed to the ITAT.
The ITAT examined the license agreement and observed that the agreement granted only a non-exclusive and non-transferable right to use the technical information and IPRs. The Tribunal noted that the royalty payments were recurring in nature and did not result in the acquisition of any capital asset or enduring benefit for the assessee.
The ITAT distinguished the facts of this case from the Supreme Court’s decision in Southern Switchgear Ltd. vs CIT, highlighting that in the present case, the royalty was for the use of technical know-how and not for acquiring it. The Tribunal also noted that the license agreement specifically required the assessee to cease using the technical information upon termination of the agreement.
The ITAT upheld the CIT(A)’s decision, treating the royalty payments as revenue expenditure and allowing them as a deduction. The Tribunal dismissed the Department’s appeal, affirming that the nature of the royalty payments in this case was revenue and not capital.
This decision reinforces the principle that royalty payments for the use of technical know-how, which do not result in the acquisition of any capital asset or enduring benefit, should be treated as revenue expenditure. The ruling provides clarity on the treatment of such expenses, ensuring consistency and fairness in tax assessments.
The ITAT’s decision in the case of ACIT vs FCC Clutch India Pvt. Ltd. underscores the importance of analyzing the nature and purpose of royalty payments in determining their tax treatment. The judgment highlights the need to consider the specific terms of the license agreement and the overall context of the payments to arrive at a fair and just conclusion.
ACIT vs FCC Clutch India Pvt. Ltd.: Royalty Disallowance – ITA 443/DEL/2019
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