COMMISSIONER OF INCOME TAX vs. FLUOR DANIEL INDIA P.LTD

IN THE HIGH COURT OF DELHI AT NEW DE


ITA No. 1141 of 2008

Reserved on: 22^nd October, 2009. Pronounced on: 30th November, 2009.

... Appellant

...Respondent

Maurya, Advocates.

CORAM:-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

- Whether Reporters of Local newspapers may be allowed 1. to see the Judgment? - To be referred to the Reporter or not? 2. - Whether the Judgment should be reported in the Digest? 3.

A.K. SIKRI, J.

For Orders, see ITA No. 1119 of 2008.

(SIDDHARTH MRIDUL) JUDGE

November 30, 2009.

pmc

IN THE HIGH COURT OF DELHI AT NEW DI


Reserved on: 22^nd October, 2009.

Pronounced on: 30th November, 2009.

1) ITA No. 1119 of 2008

. . . Appellant

. .Respondent

Maurya, Advocates

2) ITA No. 1141 of 2008

. . . Appellant

...Respondent

Maurya, Advocates.

CORAM:-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

"Whether the expenditure incurred by the assessee

Learned counsel for the appellant submitted that since can be paid by giving license as well, that itself signifies that the present user would not have proprietary rights and thus, transfer of asset would not be material consideration for determination the nature of expenditure in case of intangible property. She also submitted that Explanation 2, reproduced above, further signifies that it is not necessary that royalties to be paid lump sum, it can be paid periodically as well. Thus, manner of payment was not decisive. Furthermore, under Section 32 of the Act "software was significantly included and Appendix-X also mentions it in the list of assets on which depreciation is allowable" therefore, the software was also an asset and could be treated as capitalized. She referred to the following judgments in support of her submission:

- i) Commissioner of Income-tax v. Hindustan Insecticides Ltd. [253 ITR 520] - ii) Commissioner of Income-tax v. Harsha Tractor Ltd. [249 ITR 499] - iii) Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd. [96 ITR 672] - iv) Commissioner of Income-tax, Gujarat v. Elecon Engineering Co. Ltd. [166 ITR 66]


- (iii) The use of any patent, invention, model, design, section formula or process or trade mark or similar property; - (iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; - (v) The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or - (vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (v);"

- There is no quarrel with the proposition that under certain circumstances, software can also be treated as asset and expenditure thereon capitalized. However, what is to be found is as to whether in the present case, by incurring expenditure in terms of royalty, the assessee had acquired any benefit of enduring nature. It is only then the expenditure to be treated as capital expenditure, which is firmly established principle of law. Taking stock of various judgments, this Court defined the contours and legal principles to be kept in mind, by culling out various principles in the case of Commissioner of Income Tax Vs. J.K. Synthetics Ltd. [309 ITR 371]. - 9. In the present case, the findings of CIT (A) as well as the

sales. Holding that, the said payment would be in the nature of revenue expenditure. This Court dealt with the issue in the following manner:

- "3. Insofar as lump sum payment against transfer of technical knowhow provided by the Korean company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The CIT(A) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler. - 4. We are of the opinion that this finding of the CIT(A), as approved by the ITAT, is a finding of fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year. - 5. In CIT v. J.K. Syntheticx Ltd., 809 ITR 371, after elaborately discussing the entire case law on the subject, the Court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principle enumerated therein reads as under:- - "(v) expenditure incurred for grant of licence 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 licence to third parties without the consent of the licensor, - d) whether the licence transfer 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


obtaining access to such secret process would ordinarily be construed as capital in nature."

We are thus of the opinion that the Tribunal has rightly decided 11. the issue in favour of the assessee. Accordingly, these appeals are dismissed.

JUDGE

(SIDDHARTH MRIDUL) JUDGE

November 30, 2009. pmc