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DCIT, Circle-1(1), New Delhi vs Advance Surfactants India Ltd, 511/2/1, Rajokri, New Delhi
July, 23rd 2019

Referred Sections:
Section 37(1) of the Act.

Referred Cases / Judgments:
CIT Vs Luwa India Limited (205 Taxman 342).
CIT Vs Sharda Motor Industries Ltd. reported at 319 ITR 113
CIT Vs J.K. Synthetics Ltd reported at 309 ITR 371.
Fenner Woodroffe & Co. Ltd. vs. CIT (1976) 102 ITR 665
CIT vs. Southern Structurals Ltd. (1977) 110ITR 890
Southern Switch Gear Ltd. Vs CIT 232 ITR 359 (SC),
C.l. T. . Vs. G4S Security System India
CIT Vs. Southern Structural Limited reported
CIT, Vs. Sharda Motor Industrial Limited reported at 319 ITR of 109
CIT Vs. LUWA India Limited (205 Taxman 342).
CIT Vs. CIBA of India Ltd. 69 ITR 692
CIT Vs. Gujarat Carbon Ltd., 254 ITR 294,
Goodyear (I) Ltd. Vs. ITO 73 ITD189(Delhi),
DCIT Vs. Swaraj Engines Ltd. (2002) 124Taxman 188,

 

                    INCOME TAX APPELLATE TRIBUNAL
                      DELHI BENCH "A": NEW DELHI
               BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER
                                 AND
            SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

                             ITA No. 2935/Del/2014
                           (Assessment Year: 2010-11)
                   DCIT,                 Vs.   Advance Surfactants India
                Circle-1(1),                             Ltd,
                 New Delhi                    511/2/1, Rajokri, New Delhi
                                                  PAN: AABCA9042Q
                (Appellant)                          (Respondent)


                             CO No. 65/Del/2015
                         (In ITA No. 2935/Del/2014)
                         (Assessment Year: 2010-11)
      Advance Surfactants India Ltd,    Vs.            DCIT,
       511/2/1, Rajokri, New Delhi                  Circle-1(1),
           PAN: AABCA9042Q                          New Delhi
                (Appellant)                           (Respondent)


                Revenue by :                Smt Naina Soin Kapil Sr. DR
                Assessee by:                          None
              Date of Hearing                      07/05/2019
           Date of pronouncement                   22/07/2019


                                   ORDER

PER PRASHANT MAHARISHI, A. M.

1.   The learned Deputy Commissioner Of Income Tax, Circle ­ 1 (1), New Delhi
     has filed this appeal against the order of The Commissioner Of Income Tax
     (Appeals) ­ IV, New Delhi dated 24/2/2014 for Assessment Year 2010 ­ 11.
     The revenue has raised the following grounds of appeal in ITA NO.
     2935/Del/2014 for the Assessment Year 2010-11:-
     "1.  On the facts and in the circumstances of the case, the CIT(A) has erred
          in directing the AO to treat royalty expenses of Rs. 3,59,21,055/- as
          revenue expenditure."
2.   The assessee has raised the following grounds of appeal in Cross objection
     No. 65/Del/2015 for the Assessment Year 2010-11:-
     "1.   That on the facts and circumstances of the case the ld CIT(A) has erred
           in holding the disallowance of interest amounting to Rs. 3,17,730/-.


                                                                                 1
     2.    That the ld CIT(A) while disallowing the interest has erred in ignoring
           the fact that the company had huge reserves and surplus."
3.   Brief facts of the case shows that assessee is a company which is engaged
     in the business of manufacturing of fertilizers, chemical and paints. It filed
     its return of income on 13/12/2010 declaring income of INR 8 3714480/­.
     The assessment u/s 143 (3) of the act was passed by the learned assessing
     officer on 8/3/2013 determining total taxable income of Rs. 119949265/­
     against the returned income.     The learned assessing officer the learned
     disallowed the interest expenses of INR 3 13730/­ and disallowed the
     royalty expenses of INR 3 5921055/­. The assessee preferred appeal before
     the learned CIT ­ A who deleted the disallowance on account of the royalty
     of INR 3 5921055/­.      However he confirmed the disallowance of INR 3
     13730/­ of interest on account of interest free loan given to the directors.
     Therefore the learned assessing officer's appeal against the deletion of the
     disallowance on account of royalty payment of INR 3 5921055/­ and
     assessee has filed across objection against the disallowance confirmed by
     the learned CIT ­ A of INR 3 13730/­.
4.   Coming to the appeal of the learned assessing officer, the first ground of
     appeal is that the learned CIT ­ A has erred in directing the learned
     assessing officer to treat the royalty expenses of INR 3 5921055/­ as
     revenue expenditure.    Facts shows that the assessee has claimed royalty
     expenses of INR 4 7895741/­ paid to Chemtac free zone enterprises and
     claimed it as a revenue expenditure.     The assessee submitted, on being
     questioned that why it should not be disallowed as a revenue expenditure
     and held to be a capital expenditure, that during the year under
     consideration the assessee company has paid royalty to the above company
     in the earlier years also.   The royalty has been paid based on agreement
     executed in the last year.   The above payment is a regular payment and
     therefore should be allowed in full.    It was further stated that in earlier
     years the learned Commissioner of income tax ­ A has already allowed the
     above issue treating the same as revenue expenditure. The assessee also
     contended that it is based on production. The assessee also submitted that
     it is covered in favour of the assessee by the decision of the honourable
     Delhi High Court in case of the G 4 S security systems.        It was further
     stated that the agreement was for a period of 5 years and assessee is not
                                                                            Page | 2
     entitled to use trademark, name of know-how. Thus, all rights and know-
     how continued with the principal company. Therefore, it was contested that
     it is revenue expenditure in nature.    The assessee further relied on the
     decision of the honourable Karnataka High Court in 205 Taxman 342. The
     learned assessing officer thereafter perused the various clauses of the
     agreement for grant of license.    He held that assessee company since its
     incorporation in the business of manufacturing activity of producing acid
     slurry. Assessee is also paying lump-sum payments and royalty payment
     separately. He further held that according to article 2 of the agreement the
     assessee was granted a right to sell the products both inside and outside
     India by providing the product range know-how. It has further undertaken
     that it shall not grant during the life of this agreement any right to 1/3
     party to use the product range know how for production within or outside
     India.   Therefore, according to him it obviously means that assessee has
     obtained exclusive right for specified products by obtaining technical know-
     how from that company. He further referred to article 5.2 of the agreement
     and stated that increase in the yield ratio on the voices of product range
     know-how supplied by Cam tax gives an enduring benefit to the assessee.
     He further referred to article 7.3 and 7.4 wherein lump-sum payment has
     also been discussed. He also considered article 8.4 and 14.6.1 wherein it is
     provided that even after expiry of the agreement the assessee shall continue
     to use the technical product range know-how. Thus according to him it has
     acquired post termination rights and consequential enduring benefits.
     Consequently he held that the out of the total payment of INR 4 7894741/­
     is capital in nature and he had allowed depreciation at the rate of 25
     percentage on the above sum and therefore net disallowance of INR 3
     5921055/­ was made to the total income of the assessee.
5.   Assessee being aggrieved with the above order preferred an appeal before
     the learned CIT ­ A who deleted the above disallowance.        The learned
     departmental representative vehemently supported the order of the learned
     assessing officer, submitted that the learned assessing officer has
     considered the several clauses of the agreement of the royalty, found that
     there is also a lump-sum payment, and therefore has held that the payment
     of royalty is capital in nature.

                                                                          Page | 3
6.   The learned authorised representative vehemently supported the order of
     the learned CIT ­ A. He further submitted that the issue squarely covered
     in favour of assessee by decision of honourable Delhi High Court in cases
     discussed by the learned CIT ­ A.
7.   We have carefully considered the rival contention and perused the orders of
     the lower authorities. The learned CIT ­ A has dealt with the whole issue as
     under:-

           "5.    Ground no. 4 to 6 are directed against action of the AO in treating
           royalty expenses of Rs.4,78,94,741/- as capital expenditure. The
           appellant claimed these expenses as revenue expenses. However, the
           AO was of the view that the same were capital in nature and therefore,
           disallowed the same and allowed depreciation (5j 25% and made
           addition of Rs.3,59,21,055/-. For the sake of the convenience, the
           relevant part of the assessment order is reproduced below:
                 "4] During the year under consideration, the assessee (hereafter
                 referred as ADVANCE) has claimed royalty expenses of Rs.
                 4,78,95,741/-, paid to Chemteac freezone enterprises ( hereafter
                 referred to as CHEMTECH) and claimed the same as revenue
                 expenditure. The assessee, vide notesheet entry dt. 30.01.2013,
                 has been show caused as to why this expenditure not be
                 capitalized instead of being allowed as a revenue expenditure.
                 4.2] The assessee vide letter dt. 04.03.2013 has submitted as
                 under- That during the year under consideration, the assessee
                 Company has paid Royalty to M/s Chemtec has in the earlier
                 years. The Royalty has been paid to the said Company based on
                 Agreement executed last year. The total payment during the year
                 stands at Rs.4,78,94,641/-. The payment is a regular payment
                 expenditure and should be allowed in full.
                 In the A. Y 2009-10, your predecessor treated the payment of
                 royalty as a capital expenditure. However, the Ld. CIT Appeals
                 IV, New Delhi vide his order dated 21.12.2012   has held that
                 royalty paid by the assessee Company was in the nature of
                 revenue expenditure.
                 The main reason why the royalty was revenue expenditure is
                 attributed to the fact that the payment of royalty as based on
                 production. The assessee while making this claim for royalty
                 being revenue expenditure strongly relied on Judgment of Delhi
                 High Court in the case of G4S Security System.
                 In that case, the terms of the Agreement were for a period of five
                 years. The commission was paid on net sales. Further, the
                 assessee was not even entitled to make us of trade mark, name
                 or know-how. Thus, all rights and know-how continued with the
                 Principal Company. The Hon'ble Court held that all the royalty
                 paid in the shape of 1% of net sales for the use of trade mark and


                                                                              Page | 4
right to use the know-how would not be considered to be of
enduring nature, the expenditure was put of revenue nature.
"From the ratio of the aforesaid cases, we are of the considered
view that under me terms of the agreement as noted above, the
ITAs no. 1943/2010. 7632011 & 7,65/2011 Page 7 of 8
ownership rights of the trade mark and know-how throughout
vested with G4S and on the expiration or termination of the
agreement the assessee was to return all know-how obtained by
it under the agreement. The payment of royalty was also to be on
year to year basis on the net sales of the assessee and at no
point of time the assessee was entitled to become the exclusive
owner of the technical know-how and the trade mark. Hence, the
expenditure incurred by the assessee as royalty is revenue
expenditure and is therefore, relatable under Section 37(1) of the
Act. We thus, answer the question in favour of the Assessee and
against the Revenue and consequently dismiss all the three
appeals".
The assessee further relies on the recent Judgment of Karnataka
High Court in the case of CIT Vs Luwa India Limited (205
Taxman 342). Facts of this case are also same in the case of the
assessee. Hon'ble Court in this case held that the license was
granted as per the Agreement subject to the payment of royalty to
make use of know-how and technical assistance. The Royalty
payable was dependent on the sales made and export.,
accordingly, the expenses booked was a revenue expenditure.
From the submissions made above it will be apparent that the
royalty paid in the case of assessee company is in the nature of
revenue expenditure and should be allowed in full. The claim of
the assessee is justified in the light of the following:
a)    As no-enduring benefit has        been   acquired   by   the
      agreement with Principals.
b)    The agreement is for the fixed period of 5 years can be
      terminated prior to five years also under certain
      circumstances.
c)    The payment of royalty is production based as provided in
      para 7.5.
d)    The assessee does not acquire any trade mark or patent on
      termination of the agreement.
e)    The assessee is bound by a secrecy clause as no
      information regarding design, manufacturing process etc.
      can be passed to anybody else either during the period of
      agreement or after the termination of the agreement.
The case of the assessee is further fortified by the Judgment of
Delhi High Court in the case of CIT Vs Sharda Motor Industries
Ltd. reported at 319 ITR 113 and further in the case of CIT Vs
J.K. Synthetics Ltd reported at 309 ITR 371. In this elaborate
Judgment the Hon'ble Delhi High Court concurred with the
findings of the CIT(A) as mentioned in para 9.8. In the
                                                           Page | 5
background of these facts the CIT Appeal came to the conclusion
that the expenditure incurred by the assessee on Know-how
during the year under consideration, were in respect of business
which was already in existence and hence, the payments were
made by user of the license and were required to be treated as
expenditure on Revenue Account.
4.3] Here, it is pertinent to mention some relevant clauses of the
agreement with M/s Chemtec which comes into effect from
04/10/2007 as under-
1.    ARTICLE 2- GRANT OF LICENCE
2.1) CHEMTEC, in so far it lawfully may, grant to ADVANCE a
non-transferable and indivisible license to the PRODUCT RANGE
KNOW HOW for the manufacture of PRODUCTS in the PLANT and
to sell within and outside India the product so manufacture.
2.2 CHEMTEC undertakes that it shall not grant during the life
of this Agreement any right to a third party to use the PRODUCT
RANGE KNOW HOW for the production within India or outside
India of the PRODUCTS.
2.3) ADVANCE undertakes that it will not make or have made
any PRODUCTS outside India ·without the prior written consent
of CHEMTEC. The right of ADVANCE to exports the PRODUCTS
manufactured WILL BE permitted only to countries permitted by
CHEMTEC and is subject to such terms and conditions as may be
agreed in writing.
2.4) ADVANCE shall not be free to sub-license in India without
the prior written approval of CHEMTEC and the Government of
India, if so required.
(2)    5.1) CHEMTEC guarantees, to the extent mentioned below,
the effectiveness and the validity of the PRODUCT RANGE KNOW
HOW to be supplied
5.2) In case the PRODUCT RANGE KNOW HOW'supplied by
CHEMTEC does not enable ADVANCE TO achieve desired level of
effectiveness in terms of finished products to raw materials
(Knowh as Yield Ratio) within a period of twelve (12) weeks,
additional technical assistance will be provided by CHEMTEC to
ADVANCE.
      "Article 7.3- ADVANCE shall remunerate CHEMTEC for the
technical information as detailed /'/' Article 3-1 and know how
as described under Article 3.2 with USD One lakh (100000) as a
lump sum net of Indian 'axes. On the above amount, USD Eighty
thousand (80,000) shall he paid as fee for technical designs &
drawing and technical audit of existing unit and USD Twenty
Thousand (20,000) shall towards provision of other PRODUCT
RANGE KNOW HOW.
(3)    7.4) The payment of above amount as stipulated as under
Article 7.3 shall be made as follows:

                                                           Page | 6
i.      A sum of USD Sixty thousand (60,000) within sixty (60)
days from receipt from ail the approval and registration required
by any authority in India for this Agreement and subject to
completion of the technical audit of the existing plant of
ADVANCE by CHEMTEC and suggesting a know how to be used
for increasing the yield in the existing manufacturing locations of
ADVANCE
ii.    A sum of USD Twenty Thousand (20,000) within 9 (nine)
months from receipt from CHEM1EC know how documents
specified in Article 3.1, 3.2 of this Agreement and successful
implementation of the technology for increasing the yield at the
existing plants of Advance.
iii. A sum of USD Twenty Thousand (20,000) within twelve (12)
months from the successful implementation of know how
suggested by CHEMTEC to advance in the exiting manufacturing
locations of advance.
Article 7.5- For the licensing right as in Article 2 and in exchange
for continuing technical assistance as in Article 3.8 ADVANCE
shall pay in respect of the PRODUCTS manufactured by it during
the terms of this Agreement a royalty as per the following details:
b)   For next two years i.e. 01st April, 2008 to 31st march,
2010, the royalty shall be paid @ USD12.00 on quantities
manufactured by Advance using technology provided by
CHEMTEC.
       Article 804- in case of CHEMTEC holds any patent in
respect of PRODUCTS in India, the payment of royalty/ lum sum
payment already made by ADVANCE to CHEMTEC during the
period of this agreements shall also constitute full compensation
for use of the patent rights till the expiry life of the patent and AD
VANCE shall be free to manufacture that item even after expiry of
the collaboration agreement
(4)   14.6) Upon expiration of this agreement according to 14.3
above, the following shall apply for the time after expiration:
14.6.1)      ADVANCE shall have a non exclusive right to
continue to use the PRODUCT RANGE KNOW HOW In India
communicated to ADVANCE before expiration and shall have the
right to keep all document furnished to ADVANCE under the
agreement and shall not pay any license fee thereof, provided
however, that the PRODUCT RANGE KNOW HOE shall remain the
legal and absolute property of CHEMTEC with the limitation set
forth here above.
4.4] The assessee Company since its incorporation is in the
business of manufacturing activity of producing Acid Slurry
(LABSA) from LAB & Sulphur and Adjunct Powder from AOS
(Paste). The ADVANCE is paying lumpsum payments and royalty
payments separately. As may be noted from the clauses of the
agreement cited above, the assessee is deriving enduring

                                                               Page | 7
benefits by virtue of its agreement with Chemtech as explained
hereunder:-
4.5]  Article 2 of this agreement, CHEMTECH has allowed
ADVANCE right to sell the products both inside and outside India
by providing the product range knowhow. It has further
undertaken that it shall not grant during the life of this
agreement any right to a third party to use the product range
know how for production within or outside India. This obviously
means that ADVANCE has obtained exclusive rights for specified
products by obtaining technical knowhow from CHEMTECH.
4.6]   Article 5.2 talks about increase in the yield ratio on the
basis of product range know how supplied by CHEMTECH. This
is undoubtedly giving enduring benefits to the assessee.
4.7]   Article 7.3 and 7.4 talks about lumpsum payment totaling
USD one lakh over a period of time and is linked to the providing
know how for increasing the yield and further successful
implementation of technology provided by CHEMTECH for
increasing the yield. It is clear that this lumpsum payment is for
the purposes of increasing the yield ratio of ADVANCE and
therefore is providing enduring benefits to the assessee.
4.8]   Article 8,4 categorically confers the right to use patents by
ADVANCE for any such rights held by CHEMTECH in India by
virtue of lumpsum/royalty payments. In other words, ADVANCE
has acquired patent rights which is valid even after the expiry of
this agreement.
4.9]   Article 14.6.1 provides that even after expiration of
agreement, ADVANCE shall continue to use the technical and
product range know how. Thus, it has acquired post termination
rights and consequently enduring benefits.
4.10] It has been held by the Hon'ble Madras High Court in case
of In Fenner Woodroffe & Co. Ltd. vs. CIT (1976) 102 ITR 665
(Madras) that the assessee was not required to return any
designs or plans that had been communicated to it. With the
result the assessee could use the technical data and knowledge
acquired even after the period of agreement and deal with its as
if it were its own assets. It was held that the assessee had
acquired an enduring benefit by this agreement.
4.11] Further in the case of Addl. CIT vs. Southern Structurals
Ltd. (1977) 110ITR 890 (Madras) also it was held that where
under a collaboration agreement with a foreign co., the assessee
had obtained technical assistance by way of inventions and
designs, with mutual obligations on exchange of technical
information, and though it was prohibited from parting with the
information, the assessee was free to use all the information after
the expiry of the agreement, the assessee had acquired an
enduring benefit by the above agreement. To that extent, the
amount paid was held clearly capital.
Page | 8 4.12] In the case of Southern Switch Gear Ltd. Vs CIT 232 ITR 359 (SC), the Hon'ble Apex Court has upheld the finding of the Madras High Court that the right to manufacture certain goods exclusively in India should be taken to be an independent right, secured by the assessee from the foreign co. which was of an enduring nature, 4.13] In view of above facts and circumstances, it is held that a sum of Rs 1,31,16,132/- is capital in nature and after allowing for the depreciation @ of 25%, a sum of Rs. 98,37,099/- is added back to the total income of the assessee." 5.1 Before me, the Id. AR of the appellant has submitted that the assessee is carrying on business of manufacture of acid-slurry which is the main ingredient used in the manufacture of detergent powders. The sales are mainly to established multi nationals and large F.M.C.G. Industries. Besides, this Assessee Company is also making exports. It was submitted that to handle such big clients in a competitive market, the assessee requires to remain appraised with the latest technology and know-how in respect of products being manufactured. In the light of the above, the Assessee Company entered into an Agreement for technical know-how and assistance with M/s. Chemtec Free Zone Enterprise, a U.A.E. based Company. In terms of the Agreement a Royalty amount of Rs. 4,78,-94,741/- has been paid to the said Company during the year and the same has been claimed as a Revenue Expense and charged to the Profit & Loss Account. 5.1.1 It was submitted that as per the Agreement M/s CHEMTEC was to provide Product & Technical know-how for the manufacture of acid- slurry already being produced by the assessee at its various plants. The license to product range know-how was a non transferable license which was for a period of 5 years. The obligations of M/s. CHEMTEC were to provide information which would help the Assessee to modify its existing plants and to have the plants designed, erected and commissioned on the advice of M/s. CHEMTEC. Besides this, M/s. CHEMTEC provided technical assistance during the production by putting in experienced persons with assessee's operating personnel directly concerned with the operations and for solving technical problems. Further, they were to carry out tests on raw material of samples for manufacture of products according to specified standards of M/s. CHEMTEC. They further granted access to their factories and laboratories which were involved in the production, to the Engineers and Technicians of the Assessee's Company. It was submitted that the perusal of agreement makes it clear that it was a revenue expenditure. For the sake of convenience, the relevant submissions of Ld AR are reproduced below: "The Agreement as the name suggests was Know-how technical assistance agreement containing terms and conditions. However, to put forth the fact that Royalty Expenses paid in terms of Agreement, were in the nature of Revenue Expenses, is supported by Article 12 of the Agreement which reads as under "ARTICLE 12 - TRADE MARKS & TRADE NAMES Page | 9 12.1 Nothing in this Agreement shall be construed as a right for ADVANCE to use or in any way dispose of the name CHEMTEC or any trade mark or trade name of CHEMTEC. ADVANCE is free only to inform any actual or potential customer of the PRODUCTS that these products are manufactured under know how license acquired from CHEMTEC provided that CHEMTEC shall incur no liability of any kind whatsoever for such products otherwise than to the extent set forth in this Agreement." From the above, it will be apparent that the assessee Company did not acquire any right to use the name of CHEMTEC, neither the Assessee Company acquired any trade mark or trade name of CHEMTEC. Article 14 refers to the Terms of the Agreement and ih terms of para 14.3, it is very clear that the duration of the Agreement is for a period of 5 years from the effective date. Further in terms of para 14.4, CHEMTEC has been given a right of terminating the agreement upon giving a notice to the assessee company in certain circumstance. In view of the submissions made above the expenses under the head "Royalty" which were based mainly on production basis are in the nature of revenue expenses. While, disallowing the expenses learned Dy. Commissioner of income Tax has referred to the assessee's letter dated 28.11.2011 from where he has picked up an extract. However, he has not mentioned anything about the Judgment of Delhi High Court in the case of C.l. T. . Vs. G4S Security System India Limited which was duly referred in the same written submissions. A copy of the written submissions is enclosed. Ignoring the Judgment of Hon'ble Delhi High Court, he has referred to certain judgments which are not relevant or applicable in the present case as would be apparent from para 4.1 to 4.12 of the assessment order. Instead the learned CIT has relied on the Judgment of Hon'ble Madras High Court in the case of Fenner Woodroffee & Co. Ltd, Vs. CIT which is not called for. This is because of the following observations by the Hon'ble Court "the provisions of section 37 would not apply as the expenditure relates to a business which is not already in existence but that it is to come into existence in future". Thus, the facts of Madras High Court are distinguishable as in that case the royalty was paid for setting up a new unit whereas in the case of the assessee the Unit was already in existence. Further, the learned DCIT has relied on additional CIT Vs. Southern Structural Limited reported at 110 ITR 890. This is a case of Hon'ble Madras High Court and they have relied on the above Judgment which has duly been distinguished by the assessee in . the above paras. Page | 10 Further more, the learned DCIT has relied on Southern Switch Gears Limited vs. CIT reported at 232 ITR 359. In this case also the Hon'ble Supreme Court has referred to the findings of Madras High Court and held "that the expenses incurred were of capital nature". The facts in that case were that the Foreign Company had given exclusive hghts to manufacture certain goods to the mentioned Company for manufacture of goods. Further, the facts are distinguishable in as much as the plant of the Assessee Company was already in existence. Not only this, even after the Agreement period was over, they continued to carry on the same business under the same brand name. In fact the Hon'ble Delhi High Court in the case of CIT, Vs. Sharda Motor Industrial Limited reported at 319 ITR of 109 have referred to the Judgment of Hon'ble Supreme Court mentioned above and held that where payment of Royalty is to be paid on quantity of goods produced, the principle laid down in the case of Southern Switch Gears limited, will not apply. Thus, the learned DC IT while disallowing the claim has only referred to the above 3 judgments which have been distinguished by the assessee. The case of the assessee is further fortified by the Judgment of Delhi High Court in the case of CIT Vs. Sharda Motor Industrials Limited reported at 319 ITR 113 and further in the case of CIT vs. J.K. Synthetics Limited reported at 309 ITR 371. In this elaborate Judgment the Hon'ble Delhi High Court concurred with findings of CIT (A) as mentioned in para 39.8 " in the background of these facts the CIT Appeal came to the conclusion that the expenditure incurred by the assessee on Know-how during the year under consideration, were in respect of business which was already in existence and hence, the payments were made by user of the license and were required to be treated as expenditure on Revenue Account. Further, in para 40 the Hon'ble High Court concluded by saying Given the findings returned by both the CIT (A), as well as, the Tribunal and given the discussion held above by us, we have no hesitation in coming to the conclusion that Rs. 30,57,499/- paid to M/s. Technimont and Rs. 3,48,033/- paid to M/s. IKWA had to be treated as revenue expenditure. During the course of assessment reliance was placed by the assessee on the Judgment of Hon'ble Delhi High Court in the case of CIT /s. G4S Security System. In that case, the terms of the Agreement were for a period of five years. The commission was paid on net sales. Further, the assessee was not even entitled to make use of trade mark, name or know-how. Thus, all rights and know-how continued with the Principal Company. The Hon'ble Court held that all the royalty paid in the shape of 1% of net sales for the use of trade mark and right to use the know-how would not be considered to be of enduring nature, the expenditure was put of revenue nature. In para 10 of the Judgment, Court held :- Page | 11 From the ratio of the aforesaid cases, we are of the considered view that under the terms of the agreement as noted above, the ITAs No. 1943/2010, 763/2011 & 765/2011 Page 7 and 8 ownership rights rights of the trade mark and know-how throughout vested with G4S and on the expiration or termination of the agreement the assessee was to return all know-how obtained by it under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owner of the technical know-how and the trade mark. Hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section 37 (1) of the Act. We thus, answer the question in favour of the Assessee and against the Revenue and consequently dismiss all the three appeals ". The assessee further relies on the recent Judgment of Karnataka High Court in the case of CIT Vs. LUWA India Limited (205 Taxman 342). Facts of this case are also same in the case of the assessee. Hon'ble Court in this case held that the license was granted as per the Agreement subject to the payment of royalty to make use of know¬how and technical assistance. The Royalty payable was dependent on the sales made and export., accordingly, the expenses booked was a revenue expenditure. From the submissions made above it will be apparent that the royalty paid in the case of assessee company is in the nature of revenue expenditure and should be allowed in full. The claim of the assessee is justified in the light of the following: 1} As no-enduring benefit has been acquired by the agreement with Principals. 2) The agreement is for the fixed period of 5 years and can be terminated prior to five years also under certain circumstances 3) The payment of royalty is production based as provided in para 7.5. 4} The assessee does not acquire any trade mark or patent on termination of the agreement. 5) The assessee is bound by a secrecy clause as no information regarding design, manufacturing process etc, can be passed to anybody else either during the period of agreement or after the termination of the agreement. Accordingly, it is prayed that royalty of Rs. 1,31,16,132/-may kindly be allowed in full." 5.1.2 the ld AR further submitted that the conclusion of the Assessing Officer that the expenditure in regard to Royalty for use of Technical Know-how resulted in increase of an asset of enduring nature was uncalled for. Accordingly, the expenses for Page | 12 payment of Royalty based on production basis was allowable as revenue expenditure. They further submitted that the Hon'ble Supreme Court in the case of CIT Vs. CIBA of India Ltd. 69 ITR 692 held that payments made for the right to have access to the technical knowledge and the fruits of continuing research and experience of foreign Company and to use its patents and trade marks was on revenue account. It was also clarified that as long as the assessee did not become entitled to exclusive use of patent or knowhow as its owner, mere access to use the technical knowledge or specific process did not amount to accrual of a specific advantage. They submitted that the above view has also been taken by Hon'ble Delhi High Court in the case of CIT Vs. Sharda Motor Industrial Ltd. 319 ITR 109. Strong reliance was also placed on the case of CIT Vs. Gujarat Carbons Ltd. 254 ITR 298 wherein Hon'ble Gujarat High Court held that" that in a case where the assessee is entitled to retain all the technical data, design, documents etc. and there was also no restriction on manufacturing, even then payment of royalty was allowable as revenue expenditure. It was submitted that the assessee was not a new unit engaged in manufacturing as the benefit was acquired for running an existing business. It was further submitted that the payments debited to royalty expenses is production based. As such question of any enduring benefit does not arise. The Ld. AR was placed reliance on the decision of Hon'ble Delhi High Court in the case of CIT Vs EKL Appliances Ltd. in ITR no. 1069/2011 dated 22.2.2012 in which it was held that the payment of royalty based on year to year basis on the net sale of the assessee was revenue in nature. 5.1.3 The Ld. AR's further emphasized that the payment has been made based on production as provided in para 7.5 of the agreement. Thus, the payment of royalty is on total production and this pattern has been followed year after year. The royalty for the year has been provided @ 12 US Dollar per tonne. Since the royalty is based on production basis it is clearly revenue expenditure. 6. I have carefully considered the submissions of Ld. AR and perused the order passed by the AO. I find that the appellant company has paid royalty on the basis of production. Para 7.5 of the agreement provides as under:- "7.5 For the licensing rights as in Article 2 and in exchange for continuing technical assistance as in Article 3.8 ADVANCE shall pay in respect of the PRODUCTS manufactured by it during the terms of this Agreement a royalty as per the following details: a) In the first financial year of operation i.e. from 4th October, 2007 to 31st March, 2008 the royalty shall be paid @ USD 6.00 on quantities manufacturing by Advance using technology provided bv CHEMTEC. b) A sum of USD Twenty Thousand (20,000) within 9 (nine) months from receipt from CHEMTEC know how documents Page | 13 specified in Article 3.1 3.2 of this Agreement and successful implementation of the technology for increasing the yield at the existing plants of Advance. c) A sum of USD Twenty Thousand (20.000) within twelve (12) months from the successful implementation of know how suggested bv CHEMTEC to advance in the existing manufacturing locations of advance. The above-mentioned payments are subject to the maximum of Five(5) percent of the total Sale value. The aforesaid royalty amount will be calculated on the basis of the net sale price of the product exclusive of export duty minus cost of standards bought out component and the landed cost if the imported components (and not of raw material) irrespective of source of procurements including ocean freight, insurance, custom duty etc. Further all trade discounts, commission return, allowances or rebate for defective merchandises, packing freight, shipping and transporting charges, sales taxes and other and outgoing levies or taxes will also be deducted while computing the net ex-factory sale price of the product. The royalty due to CHEMTEC shall be paid in 6 months from the end of the financial year subject to Audit being carried out both at ADVANCE and CHEMTEC. The above royalty is net of Indian taxes and will be paid for a period of 5 years during the period of agreement. Taxes leviable on payments under this clause will be borne by ADVANCE (emphasis is supplied). The above clause makes it plear that the royalty payment was based on production. The jurisdictional High Court in the case of CIT vs. G4S Securities System (India) Pvt. Ltd. 338 ITR 46 has considered a similar issue and held in para 9 and para 10 of judgement as under:- "9. From the terms of the agreement it is noticed that this arrangement was for a period of 5 years, which may be extended by another period of 5 years unless either party gives 6 months notice to the other party prior to the end of such 5 years period. The payment of commission @ 1% was based on the net sales and not lumpsum. On the termination of expiration of the sub license agreement, the assessee was to return all G4F knowhow obtained pursuant to the said agreement. Not only that, the assessee was not even entitled to make use of the trade mark name or G4F knowhow and was forthwith to change it's corporate and/or trade names. All rights and knowhow, therefore, continued to vest in G4F and it was only the right to use the knowhow that was made available to the assessee and that too based on its net sales. That means all the royalty paid in the shape of 1 % of net sales for the use of trade mark and right to use knowhow could not be considered to be of enduring nature and thus capital expenditure. The expenditure was to be of revenue nature. In the case of Jonas Wood Head and Sons Vs. Page | 14 CIT, 117 ITR 55, it was held that the question regarding capital or revenue expenditure depends on the terms of agreement in each case. In the case of CIT Vs. Gujarat Carbon Ltd., 254 ITR 294, it was held that the payment of revenue under the agreement was directly relatable to services which ITAs No. 1943/2010, 763/2011 & 765/2011 Page 7 of 3 were in the revenue field and were allowable as revenue expenditure. In the case of Goodyear (I) Ltd. Vs. ITO 73 ITD189(Delhi), the assessee had not acquired ownership right of technical knowhow but transfer of use of licenses. There was no advantage of enduring nature and hence it was held to be a case of revenue expenditure. In the case of Travancore Sugar and Chemicals Ltd. 62 > ITR 566 (SC) it was held that whenever a payment is based on a percentage of turnover or profits, it necessarily has no relation to the capital value of the asset, because it cannot be known at the time of the agreement what the turnover or profits will be over a period of years. In another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124Taxman 188, the Tribunal held, revenue payment is allowable as revenue expenditure, since it is related to sales and that it is paid for better conduct, efficiency and improvement of the existing business or product manufactured by the assessee. In the case of CIT Vs. Lumax Industries Ltd. (2008) 173 Taxman 290 (Delhi); this Court has also held that the payment of license fee on year to year basis for acquisition of technical knowledge would not amount to capital expenditure, but the revenue expenditure. 10. From the ratio of the above said cases, we are of the considered view that under the terms of the agreement as noted above, the ITAs No. 1943/2010, 763/2011 & 765/2011 Page 8 of 8 ownership rights of the trade mark and knowhow throughout vested with G4f and on the expiration or termination of the agreement the assessee was to return all G4F knowhow obtained by it under the agreement. The payment of royalty was also be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owner of the technical knowhow and the trade mark. Hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section. 37(1) of the Act. " Similarly, the jurisdictional High Court in the case of CIT Vs. J K Synthetic; 176 Taxman 355 Delhi (2009), where the collaboration was for process and technical know how and also for the supply of technicians and training of personnel, has held that in determining whether a particular expenditure is revenue or Capital, the broad principles which require to be applied to the facts of each cases. The royalty payment was allowed as revenue expenditure. In the case of Climate Systems India Ltd vs CIT (2009) 319 ITR 113(Del), the jurisdictional High Court has held that where the payment of royalty depended on the quantum of sales which would decrease or increase every year depending upon the decrease or increase in the sales, Page | 15 payment of royalty would be a revenue expenditure. Similar view has been held by the jurisdictional High Court in the case of CIT Vs EKL Appliances Ltd. in ITR no. 1069/2011 dated 22.2.2012. 6.1 In view of the facts of the case and judicial pronouncements on the issue, respectfully following the judgement of the jurisdictional High Court as discussed above, I agree with the submissions of the Ld AR that the royalty payment made to CHEMTEC was a revenue expenditure as the same was linked to the production. The AO is directed to allow the same as revenue expenditure and delete the addition of Rs. 3,59,21,055/-. Grounds No 4 to 6 are allowed." 8. Recently the honourable Delhi High Court had an occasion to consider the identical issue in Hilton Roulunds Ltd Vs CIT ( ITA 325/2005) as under:- 16. There is exhaustive case law on the various tests distinguishing capital and revenue expenditure. In CIT, Bombay v. Ciba of India Ltd. AIR 1968 SC 1131, the Supreme Court, was dealing with a case whereby a Swiss company had licensed its patents to its Indian subsidiary, in order to enable it to make full use of and vend the inventions stated therein, as also its trademark. However, under the agreement, the Swiss Company reserved the right to terminate the license at any given point, and also precluded the Indian Company from acquiring any proprietary right in its intellectual property. The licencee was merely granted a ,,right to use to the Indian Company. The Supreme Court, on these facts, held as under: "13. The assessee did not, under the agreement, become entitled exclusively even for the period of the agreement, to the patents and trade marks of the Swiss Company it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded. The assessee was on that account a mere licencee for a limited period of the technical knowledge of the Swiss Company with the right to use the patents and trade marks of that Company....... ................... 15. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss Company for a limited period by making that technical knowledge available the Swiss Company did not part with any asset of its business nor did the assessee acquired any asset or advantage of an enduring nature for the benefit of its business." 17. In Empire Jute Company Ltd. v. CIT, (1980)124 ITR 1 (SC), which was a case dealing with purchase of loomhours (number of working hours on the loom), the Supreme Court observed as under: "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a Page | 16 correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated: ".... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all." There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." Thus, in this case the Supreme Court held that test of enduring benefit is not an absolute or a conclusive test and depends on the facts and circumstances of each case. 18. In Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC), the Supreme Court followed the decision in Empire Jute (supra) and held: "There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose, of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) at p. 262, this court said: "As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, or be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test." Page | 17 In the result, for the foregoing reasons, the appeal succeeds and is allowed and the question of law referred to the High Court for its opinion in ITR No. 78 of 1970 is answered in the affirmative and against the Revenue. The judgment under appeal is set aside." Even a `once for all' or lumpsum payment was held to be inconclusive in deciding whether the expenditure was capital or revenue in nature. 19. In CIT v. Madras Auto Services (P.) Ltd. [1998] 233 ITR 468 (SC), while dealing the question as to whether money spent by the tenant for construction in lieu of benefit of reduced rent for the additional space was capital or revenue expenditure, the Supreme Court observed as under: "All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus, saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure." 20. Even this Court has had occasion to deal with cases where it had to determine the nature of expenditure i.e., capital or revenue. In CIT v. Saw Pipes Ltd. [2008] 300 ITR 35 (Del), the State Electricity Board had set up electricity lines for which service charges were paid by the Assessee. This Court held that the expenditure for the same should be held to be revenue expenditure. 21. In CIT v. J.K. Synthetics Ltd. (2009) 309 ITR 371 (Del) (hereinafter, ,,JK Synthetics), this Court, dealing with a case where an Indian Company had acquired a license from an Italian Company for use of technical knowledge and user of its patents and trade marks, held as under: "31. An overall view of the judgments of the Supreme Court, as well as of the High Courts would show that the following broad principles have been forged over the years which require to be applied to the facts of each case: (i) the expenditure incurred towards the initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while is the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produce profits it would be in the nature of the revenue expenditure; (ii) it is the aim and object of the expenditure, which would determine its character and not the source and manner of its payment; (iii) the test of "once and for all" payment, i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can
Page | 18 be determined by looking at what is the true nature of the asset which is acquired and not b the fact whether it is a payment in "lump sum" or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business as against an expense undertaken for the benefit of the business as a whole; (iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down; (v) expenditure incurred for grant of License which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the Licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue." Page | 19 22. Relying upon JK Synthetics (supra), this Court in CIT v. V.R.V. Breweries & Bottling Industries Ltd. (2012) 347 ITR 249 (Del) held as under: "22.2 The observation made in paragraph 58 at page 414 of the aforementioned judgment, on which reliance has been placed by the learned counsel for revenue seeks only to emphasise that the assessee in that case, had only acquired access to technology which was not related to any secret process or patent rights and thus in continuum it is mentioned that not even a right to use the trademark or brand name had inhered in the assessee. From this, it cannot be concluded, as is sought to be done by the learned counsel for the revenue that any payment made for use of trademark or trade name ipso facto will give colour to the payment as if it is made on capital account. This is in our view is a complete mis-reading of the judgment. It is well settled that a judgment is an authority for what it decides and not what is construed as logically flowing from it. Judgments cannot be read as statutes. A stray sentence picked out of context, cannot be used to turn its ratio around. 22.3 We have already referred to the provisions of the agreement. A perusal of the provisions of the agreement would show all that the assessee acquired was the use of the brand names and the trade marks of SWCL, which find a mention in Appendix-C annexed to the said agreement. The assessee acquired no right to any secret process or formulae or even any right title and interest in the trade marks and brands under which the IMFL products were sold. As a matter of fact assessee's rights were co-terminus with the subsistence of the said agreement. Therefore, we have no hesitation in rejecting the contention of the revenue in this regard.......It is quite evident that the Revenue took the stand, though erroneously, that royalty paid on use of brand names and trade marks would classify the expenditure as one made on capital account." 23. Thus, extrapolating from the judgments referred to above, in the context of trademark licensing, in order to determine whether a particular expenditure is capital or revenue in nature, some of the factors that are relevant are - i. the nature of the right being given - exclusive, non-exclusive, permanent or term based; ii. the benefit being derived - whether enduring, long term, short term; iii. the nature of payment being made - periodic, lump sum, revenue linked payments etc. 24. The above factors are singularly not determinative of the nature of the expenditure. It depends on the facts of each case. In a given case, a lump sum payment may still be revenue expenditure. A long term licence, without ownership vesting in the licensee could also be revenue expenditure. An exclusive right to use, to the exclusion of the owner, though termed as a licence, could be a transfer of title in the mark, and could constitute capital expenditure. Thus, the Court has to see not merely the terms of the agreement but also the facts and circumstances surrounding the agreement in order to determine the nature of the expenditure. Licensing of Trade Marks 25. Trade Marks which are both registered and unregistered can be transferred. The transfer of a Trade Mark can either be by means of a license or an assignment. A license to a registered Trade Mark in India can be of two kinds: Page | 20 a) A simple license agreement which is in the nature of a permissive use; b) A Registered User, wherein the license agreement is registered with the Registrar of Trade Marks and certain rights accrue to the licensee as per statute. 26. An assignment is however a complete transfer of the right and title in a mark. Assignments can also be of various kinds. For eg., Assignment could be product specific, territory specific, but they will vest complete and absolute ownership in the assignee. Assignment of a registered trade mark can be with or without the goodwill of the business concerned. Such an assignment can be in respect of all the goods or services or part of the goods or services for which the mark is registered. However, an unregistered trademark is assignable with the goodwill of a business and if the same is assigned without the goodwill of the business, the nature of the transfer would have to be determined on the facts of a particular case. 27. The fundamental test to determine as to whether a particular mark has been licensed or assigned is to see if the licensor/assignor has retained any rights in the mark. If rights are retained with the owner, usually it is a license and if no rights are retained by the owner, then it would usually be an assignment. A license is, therefore, nothing but a permissive use of the mark, which permission, is revocable. A `right to use' is usually a license and not an assignment, except in certain circumstances. Some of the questions that determine whether an arrangement is a license or an assignment include: i) Whether the user acknowledges the licensors right and title over the mark? ii) Whether it is a mere right to use the mark or it was a transfer/assignment of a permanent nature? iii) Whether the manner of use is specified and restricted and the effect thereof on the rights of the user? iv) Whether the payment made by the User is one-time, fixed running royalty or a percentage of sales, with or without investment made by the Licensor on marketing and advertising? v) Whether the licensor has right of supervision and control over the use of the mark? vi) Whether sole and exclusive right was conferred on the user and the effect thereof? vii) Whether the user can further transfer his rights to third party, with and without consent of the licensor and the effect thereof? viii) Whether the licensor had the right to terminate the license and if so, under what circumstances? ix) Whether upon termination by the licensor, the user has to stop use of the mark? x) Whether or not the right to sue is given and conferred on the user? xi) Whether there is a transfer of goodwill of the business and/or goodwill in the mark? xii) Whether there are multiple users of the same mark? 28. A license agreement usually has some or all of the above stipulations. Thus, the nature of the agreement can be easily deduced from the existence of all or any of the above conditions/characteristics. In some circumstances however, an Page | 21 exclusive licence which excludes the owner from using the mark and vests perpetual rights without any termination clause, could constitute an assignment. However, the present case is not one such case. 29. The question in the present case is as to whether the right in the mark "HILTON" was transferred in a manner that was to give a long term benefit to the appellant. The first agreement contains an acknowledgment that HRL was the owner of the mark. The agreement grants an exclusive right to use "HILTON" owned by HRL to the appellant. The appellant could not, without HRLs permission apply for registration of the mark on its own or dispute the ownership of HRL. If any infringement came to the knowledge of the appellant, it had to seek the prior written consent of HRL, which had the right to decide as to what action it would take whether with or without the appellant, in respect of such infringer. An application could have been filed to register the appellant as a registered user and such application could have been made jointly only. The termination clause was clear. Though the initial period was 10 years, the agreement could have been terminated with 12 months written notice by either party. The termination was automatic under some circumstances as detailed in the agreement. One of the reasons for termination could be the termination of the joint venture agreement. Upon termination of the license agreement, the appellant would not have any rights to use or seek registration of the mark "HILTON". This agreement was in the nature of a license agreement and had all the trappings of a license. The rights of HRL were completely preserved and only a right to use was being given to the appellant. No long term benefit accrued to the appellant. The royalty payable by the appellant was 1.8% of the net selling price from the date of commercial production. 30. The second Agreement dated 9th November, 1995 was almost identically worded to the first license agreement, except for the fact that the royalty was now Rs.1 crore as a lump-sum for a period of 10 years. 31. The question as is relevant to the present case is, therefore, whether any long term benefit was acquired by the appellant under the agreement dated 9th November, 1995, so as to categorize the payment of Rs.1 crore as a capital expenditure. 32. It is relevant to record some important facts at this stage. The mark "HILTON" in respect of Raw Edge, Wrapped V Belts, was a mark which was known in India in the relevant industry. It was being used by HRL which was the original owner for many years prior to the joint venture agreement. The registration of the mark Hilton dates back to 3 rd June, 1977 and the user claimed for the said mark was form 1st December, 1972. When the joint venture was entered into, the mark was licensed to the joint venture company i.e. the appellant which, thereafter, became a subsidiary of RF. HRL did not have any stake in the appellant after 9th November 1995. The appellant company which was known as Hilton Roulunds Ltd. is now known as Contitech India Private Limited. Thus even the corporate name of the company has changed, though subsequently. The settled position in law is that use by a licensee would also inure to the benefit of a licensor, for it would continue to remain the owner, unless there was also part transfer of title. In this case, title and ownership of the mark was not transferred. The appellant only had permission and approval to use the mark. Thus, the benefit of the use of the mark "HILTON" during the period when it stood licensed to the appellant inures to HRL. In Fedders Lloyd Corporation Ltd. v. Fedders Corporation Page | 22 ILR (2005) I Delhi 478, it was held use of the trademark by a licensee inures to the benefit of the licensor. This position was again reiterated by this Court in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation -3(2017) 390 ITR 199 (Del). 33. Thus, when the benefit of the use of the mark has inured to the licensor i.e. HRL, the amount, that has been paid to HRL was a consideration for permission to use the mark, and not for acquiring ownership rights in the mark. The mark "HILTON" did not belong to the appellant. It also did not belong to either of its current promoters i.e. RF or IFU. It belonged to HRL which was one of the joint venture partners when the appellant was initially formed. The use of the mark "HILTON" thus, merely facilitated the appellants business in India i.e. it facilitated the appellants entry into India under the brand name and the trade name which was familiar to the industry and market. The advantage of having used the mark "HILTON" between 1992 and 2005 could endure and benefit the appellant as a permitted and authorized user, but it cannot be called an acquisition and benefit of capital nature so as to constitute capital expenditure. The appellant did not purchase and acquire title in the trademark. It did not retain any rights in the mark. In fact the appellant no longer uses the word "HILTON" either as a trade mark or trade name or as a part of its corporate name. Thus, the payment of Rs.1 crore was for the purpose of obtaining an advantage in carrying on its business and is therefore in the revenue field. 34. In order to ascertain whether there was permanent transfer of the trademark "HILTON" in favour of the appellant, we had asked and called upon the counsel for the appellant to state the present position. The appellant has filed additional documents stating that the name of the appellant was changed to ,,Roulands Codan India Limited on 29th November, 2006. Subsequently, there was another change as of 11th December, 2006. The appellant is now known as ,,Contitech India Private Limited. Appellant states that they had applied for transfer and registration of the trademark "Hilton Euroflex" on 13th January, 1994, but on 28th April, 1999 they had deleted the word "Hilton" from the said application. Appellant has also placed on record pamphlet/price list that they had not used the mark "HILTON" and are marketing their goods on the mark "Roflex", which is their registered trademark since 10th July, 1996. We would accept and not proceed on the basis that the subsequent change in trademark would not be conclusive and determinative of the fact whether the mark "HILTON", was acquired by the appellant as a capital asset or the payment made was to use the mark "HILTON", which belonged to and was owned by a third party, namely, HRL. Subsequent facts would only confirm our opinion and ratio that the right conferred on the appellant under the second license agreement entered into 9th November, 1995 had only authorized the appellant to use the mark for ten years. The appellant had not acquired any permanent ownership or title in the said mark. The said payment though in lump sum was made to use the said mark and could well have been made with reference to the total sales as was the position in the first agreement dated 27 th January, 1993. Certain terms and conditions for using the mark "HILTON" were changed and altered vide agreement dated 9th November, 1995, but in substance with reference to the rights acquired there was no difference between this agreement and earlier license agreement dated 27th January, 1993. 35. All the above facts point to the clear conclusion that the payment of Rs.1 crore ought to be treated as revenue expenditure. There is no doubt in the proposition relied upon by the revenue, as held in Honda Siel (supra), the Court Page | 23 has to look at the real nature of the agreement. On an analysis of the agreement on record, there is no doubt that it was merely a trademark license agreement, which conferred no enduring benefit or long term benefit to the appellant. 36. A supplemental corporate license agreement was executed along with the first license and the second license agreement. Under these agreements also the right to use the corporate name "Hilton" was non-exclusive and royalty free. Though, it was to remain in full force and executed without any limit of time, a licensor had the right to terminate the said agreement with 30 days notice. Thus, even the corporate name license agreement was terminable and did not create ownership rights in the appellant for the word "HILTON". The Court takes notice of the fact that the corporate name has in any event been changed by the appellant. Moreover, before the Income Tax Authorities, the appellant had filed to letters dated 16th March, 1997 and 24th September, 1997 signed by the Company Secretary of the Appellant and by HRL, respectively. Both these letters confirm that the right to use the mark"HILTON" was for a limited period of 10 years. The Revenue submits that under clause 12, there was no limitation of time in the license. This position when considered in isolation would be correct, however, when read with the letters submitted to the Income Tax Authorities, as also the stoppage by the appellant of the use of the mark "HILTON" both as a trade mark and as a trade name, it is clear that the appellant was merely a licensee of the mark." In the present case also the title in ownership of the know how was never transferred. The appellant only had a permission and approval to use the trademark. Thus the benefit of the use of the royalty during the period when it stood license to the taxpayer inures to the license owner. Thus, the assessee only had permission and approval to use the above technology. The payment made by the assessee was merely a consideration for permission to use the know-how and not for acquiring any ownership right therein. The technology did not belong to the taxpayer it merely facilitated the taxpayer's business. In fact, the assessee did not purchase and acquire title in the above know-how and therefore it did not retain any right in that. The assessee obtained the above right only for surviving in the competitive market to remain apprised with the latest technology and know-how in respect of goods manufactured by it. Further, the terms of the payment of the royalty was also with respect to the quantity manufactured by the assessee using the technology provided by the owner. The honourable Delhi High Court also considered an identical issue in case of CIT vs G4S securities Systems (India) Private Ltd 338 ITR 46 wherein it has been held that such royalty payments are revenue in nature. The jurisdictional High Court also dealt with the similar issue in CIT vs EKL appliances Ltd also. The learned departmental representative could not point out any infirmity in Page | 24 the order of the learned CIT ­ A as well as the decision relied upon by him of the jurisdictional High Court. In view of this facts and circumstances of the case as well as respectfully following the judgments of the honourable jurisdictional High Court we do not find any infirmity in the order of the learned CIT appeal in holding that the royalty payment made by the assessee was revenue expenditure as the same was linked to the production. Accordingly, the solitary ground of appeal of the learned AO is dismissed. 9. Accordingly, appeal filed by the learned assessing officer in ITA number 2935/del/2014 for assessment year 2010 ­ 11 is dismissed. 10. Now we come to the cross objection filed by the assessee against the confirmation of disallowance of interest of INR 3 13730/­. The brief fact shows that assessee has claimed interest expenditure of INR 9 7722066/ ­ in the profit and loss account on account of loan taken from banks and various financial institution. It has also advanced loan to its directors on which it is not charging any interest. Therefore, the learned assessing officer questioned the assessee about the proportionate disallowance of the same. Assessee submitted that no fresh advances have been made by the assessee company during the year under consideration and therefore the current year's interest should not be disallowed. The learned assessing officer noted that assessee company has given loan to its directors of INR 1,600,000 and INR 1 014420/­ to two directors and has not charged any interest on these loans. Therefore he calculated the interest at the rate of 12% on these loans and disallowed a sum of INR 3 13730/­. 11. On appeal before the learned CIT ­ A the above disallowance was upheld and therefore in the cross objection the assessee has raised the above ground. 12. The learned authorised representative reiterated the submissions made by the assessee before the learned CIT ­ A. 13. The learned departmental representative supported the orders of the lower authorities. 14. We have carefully considered the rival contention and the orders of the lower authorities. Apparently the assessee company has paid a sum of INR Page | 25 9 7722066/­ as interest on loans taken from the various banks and financial institution and in turn it is given an interest free loan to its directors amounting to INR 2 614420/­. The assessee has contested that it has not made any fresh advances during the year under consideration to both the directors and further the learned assessing officer has ignored the fact that the company has substantial reserves and surpluses and accordingly no interest should be disallowed. However, before us the assessee has not produced any information with respect to the available interest free funds. Therefore, if the assessee has interest free funds available with it sufficiently to meet the interest free loans given to its directors, the presumption would be available that non-interest bearing Funds were out of interest free funds available with the assessee. The Hon'ble Supreme Court held so in 401 ITR 466 in CIT Vs. Reliance Industries Ltd. Therefore, this ground of appeal is set aside to the file of the ld AO with a direction to the assessee to show that it has sufficient amount of interest free funds available. The ld AO is directed to verify the same and if interest free funds are in excess of non interest bearing advances to delete the above disallowances. Accordingly, the solitary ground of cross objection is allowed for statistical purposes. 15. Accordingly, CO of the assessee is allowed for statistical purposes. Order pronounced in the open court on 22/07/2019. -Sd/- -Sd (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 22/07/2019 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Page | 26
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