Case Number: ITA 446/DEL/2019
Appellant: DCIT, Circle-11(1), New Delhi
Respondent: Hema Engineering Industries Ltd., New Delhi
Assessment Year: 2015-16
Case Filed On: 2019-01-22
Order Type: Final Tribunal Order
Date of Order: 2019-08-23
Pronounced On: 2019-08-23
The case of DCIT vs Hema Engineering Industries Ltd. revolves around the classification of royalty expenses paid by the assessee. The central issue is whether the royalty payments made by Hema Engineering Industries Ltd. should be treated as capital expenditure or revenue expenditure. The appellant, DCIT, Circle-11(1), New Delhi, contended that the royalty payments were capital in nature, while the respondent, Hema Engineering Industries Ltd., argued that they were revenue expenses.
Hema Engineering Industries Ltd. is engaged in the manufacturing and sale of auto components. For the assessment year 2015-16, the company made significant royalty payments to a foreign entity for the use of technical know-how and intellectual property rights. The company treated these payments as revenue expenditure in its tax filings. However, during the assessment proceedings, the Assessing Officer (AO) reclassified these expenses as capital expenditure, leading to additional tax liability for the company.
The appellant argued that the royalty payments made by Hema Engineering Industries Ltd. were capital in nature because they were made for acquiring a technical know-how that provided an enduring benefit to the company. The appellant relied on the Supreme Court’s decision in the case of Southern Switchgear Ltd vs CIT, where the court held that payments made for acquiring technical know-how that results in a long-term benefit to the business should be treated as capital expenditure.
The respondent, represented by its legal counsel, contended that the royalty payments were made for the use of technical know-how on a non-exclusive and non-transferable basis, and therefore, should be treated as revenue expenditure. The respondent argued that the payments were made on a recurring basis, and the technical know-how did not result in the creation of any capital asset. The respondent cited several judicial precedents, including CIT vs. Hero Honda Motors Ltd, where similar payments were classified as revenue expenditure.
The Income Tax Appellate Tribunal (ITAT) considered the submissions of both parties and reviewed the relevant judicial precedents. The Tribunal noted that the royalty payments were made for the use of technical know-how and intellectual property rights on a non-exclusive and non-transferable basis. The Tribunal also observed that the payments were made on a recurring basis, and the technical know-how did not result in the creation of any capital asset for the company.
The Tribunal distinguished the facts of the present case from those in Southern Switchgear Ltd vs CIT, noting that in the latter case, the technical know-how acquired had a long-term benefit and was considered a capital asset. In contrast, the technical know-how in the present case was used for the day-to-day operations of the company and did not create any enduring benefit.
Based on these observations, the Tribunal concluded that the royalty payments made by Hema Engineering Industries Ltd. should be treated as revenue expenditure. The Tribunal upheld the respondent’s argument and directed the Assessing Officer to reclassify the payments as revenue expenditure.
The ITAT’s decision in the case of DCIT vs Hema Engineering Industries Ltd. underscores the importance of the nature of technical know-how agreements in determining the classification of royalty payments. The ruling clarifies that royalty payments made for the use of technical know-how on a non-exclusive and non-transferable basis, without resulting in the creation of a capital asset, should be treated as revenue expenditure.
This decision has significant implications for companies engaged in technical collaborations and licensing agreements. It emphasizes the need for clear documentation of the terms of such agreements and the nature of payments made. Companies must ensure that the agreements explicitly state whether the technical know-how is non-exclusive and non-transferable to avoid disputes with tax authorities.
The ITAT’s decision in this case provides valuable guidance for the classification of royalty payments in tax filings. It highlights the importance of analyzing the terms of technical know-how agreements and the nature of the benefits derived from such arrangements. Companies should carefully review their agreements and consult with tax professionals to ensure proper classification of expenses in their tax returns.
DCIT vs Hema Engineering Industries Ltd: Classification of Royalty Expense – ITA 446/DEL/2019
Manage the increasing number of hearings effortlessly by leveraging the legal AI revolution We are India's Leading revolutionary AI-powered legal platform where you can get enough insights into top cases and judgements.
Research Platform