CIT vs. HONDA SIEL POWER PRODUCTS LTD

It p t #3 o/o 2O,O5.2011 Present: Mr. Sanjeev Sabharwal, Sr. Standing Counsel for the Revenue. Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advs. for the respondent/assessee. +lTA No.748l2o1t {< The respondent/assessee herein has claimed royalty and technical guidance fee as deduction on current expenses and revenue expenditure. The Assessing Officer (AO), however, capitalized 25o/o of such royalty expenses as well as technical guidance fee and allowed balance fee as revenue expenditure while passing the assessment order under Section L43(3) of the Income Tax Act (for brevity 'the Act'). Thereafter, the Commissioner of Income Tax in exercise of its power under Section 263 of the Act, set aside the order of the AO observing that the same was erroneous and prejudicial to the interest of Revenue inasmuch as the AO had not examined the issue or examined the same properly and in fact, the entire expenditure on account of royalty as well as guidance fee should have been capitalized, as it was capital expenditure and not the Revenue expenditure. The order of the CIT has been set aside by the lncome Tax Appellate Tribunal (in short 'the Tribunal') vide impugned order dated 22.L0.20L0. iF Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified

i on going through the said order, one can'find that the main reason for setting aside the order of the CIT was that the AO had specifically gone into the various terms and conditions of Royalty and Technical Guidance Agreement entered into by the assessee with the Japanese company to whom the said payments were made' The Tribunal also found that both the aspects, viz', payments of royalty as well as payments of guidance fee were discussed in detail by the AO in the light of the Agreement and on that basis, after relying upon the judgment of the Supreme Court in the case of Southern Switch Gear Ltd. Vs. Commissioner of Income Tax 232 ITR 359 (SC), 25o/o ot payments was capitalized. The Tribunal in respect of royalty found that the issue was considered by the AO in the following manner: "Therefore, it is clear from the above that the terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the assessee are provided by Honda. Further, the assessee has paid the royalty for the acquisition of an indivisible, non transferable and exclusive license in favor of the assessee to manufacture and assemble the products and the parts in the Territory, and to sell and distribute in the Territory the products and the parts so manufactured or assembled or procured. Moreover, the assessee can grant indivisible and non-transferable sublicense to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products' Moreoier, in the event of the expiration of the Contract, the assessee may continue to use know-how and the Industrial property Rights for the purpose of manufacture, assemble, procurernenl, sale, delivery and service of the products and ihe parts. Clearly the above rights have benefit of enduring nature and therefore, the acquisition of such rights, as discussed above, may be treated partly towards such rights, as discussed above, may be treated partly towards cjpital and partly towards the revenue. The Hon'ble Supreme Court in the Southern Switch Gear Ltd' Vs. CIT reported in 232 ITR 359 (SC) and Hon'ble Madras High court in the same case reported in 148 ITR 272 held that 25o/o of such royalty expenses constituting a capital asset. ir-