Royalty Expenditure for Use of Technical Know-How can be treated as Revenue Expenditure: ITAT [Read Order]

The ITAT, Delhi bench has held that the royalty expenditure for the use of know-how can be treated as revenue expenditure for the purpose of the Income Tax Act, 1961.

Before the Tribunal, the assessee has challenged the disallowance of expenditure amounting to Rs.20,71,510/- as capital expenditure being 25% of royalty amount paid of Rs.82,86,039/- by the assessee on account of the use of technical know-how and technical process of licensor.

After considering the arguments from both the sides, the Tribunal bench comprising Shri Kul Bharat, Judicial Member & Shri Pradip Kumar Kedia, Accountant Member has observed that a reading of the license agreement thus gives an impression that the assessee cannot sub-license the same to any third party and the licensor continues to exercise all pervasive domain over the ownership over the technical knowhow in exclusion to the licensee assessee. The assessee has been merely given a license to use the licensed information/technical know-how during the currency of license agreement.

The ebnch pointed out that as per the agreement, the assessee is not entitled to the use of licensed technical know-how on termination of agreement and is obliged under the contract, to relinquish the advantage accruing by virtue of license agreement.

“All the above features of the agreement make it unequivocal that what the assessee, in essence, has acquired under the agreement is a mere right to use the licensed technical know-how in question. A mere access to the technical knowledge by virtue of such license agreement, in our view, could not permit the revenue authorities to artificially assume certain part of the expenditure as advantage of capital nature or something akin to acquisition of any asset or advantage of enduring nature for the benefit of its business. In the case in question, it cannot be said that the Sweden Company had relinquished its command over the impugned technical know-how information in favour of the assessee in any manner. In the absence of any vested advantage to assessee or any indefeasible right, it is farfetched to hypothetically presume any component of capital expenditure implicit in the outgo towards royalty,” the Tribunal said.

To Read the full text of the Order CLICK HERE

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