Whether when royalty agreement clearly states that no proprietory interest shall be transferred to assessee with respect to any service being rendered by licensor, even then sum paid is to be treated as capital in nature - NO: HC

THE issue before the Bench is - Whether when the royalty agreement clearly states that no proprietory interest shall be transferred to the assessee with respect to any service being rendered by the licensor, even then the sum paid is to be treated as capital in nature. NO is the answer.

Facts of the case

The assessee company had claimed expenses paid on account of royalty towards M/s. Herbalife International Inc as revenue expenditure. In respect of his claim, he gave a copy of the license agreement. AO was of the view that the benefit conferred on the assessee and the agreement was of enduring nature and therefore, the acquisition of such benefit is to be treated partly towards capital and partly towards the revenue. The SC in the case of Southern Switch Gare Ltd., Vs. CIT reported in 232 ITR 359 and the judgment of the Madras HC in the case reported in 148 ITR 272 held that 25% of the royalty expenses constitutes capital expenditure as it gives rise to the assessee a benefit which was of enduring nature and thereby, constituting a capital asset. On appeal, CIT(A) held that the judgment of SC referred to supra had no application to the present case of the assessee. The revenue had accepted the claim of assessee of royalty as revenue expenditure in the preceding years. When there was no change in the facts and circumstances of the case, one should not be allowed to change the constant stand taken in earlier orders and therefore, said finding was set-aside and the entire amount was treated as revenue expenditure. On further appeal, Tribunal had upheld the said order..

Held that,

++ the provisions of agreement entered into between the assessee and M/s. Herbalife International Inc was not properly looked into by any of the authorities. The said provisions discloses that the agreement entered into between the parties provides for renewal automatically. Clause 6.2 makes it abundantly clear that no proprietary interest shall be transferred to the assessee in respect of the files, lists, records, documents, drawings, specifications and other technical information which was furnished to the assessee by the licensor. Under these circumstances, it cannot be said that the assessee got any enduring benefit in the said agreement which is a condition precedent for treating the payment as capital expenditure. Therefore, rightly the order passed by the Assessing Authority is set-aside by the Appellate Authority and held the entire amount as revenue expenditure. In that view of the matter, we do not see any merit in the appeal. Accordingly, substantial questions of law is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed