Delhi High Court
The Commissioner Of Income ... vs Sierra Industrial Enterprises P. ... on 14 July, 2010
Author: Manmohan
#5
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 844/2010
THE COMMISSIONER OF
INCOME TAX-XIII ..... Appellant
Through: Ms. Rashmi Chopra, Advocate
versus
SIERRA INDUSTRIAL
ENTERPRISES P. LTD. ..... Respondent
Through: None
% Date of Decision: 14th July, 2010
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN
1. Whether the Reporters of local papers may be allowed to see the judgment? No
2. To be referred to the Reporter or not? No
3. Whether the judgment should be reported in the Digest? No
MANMOHAN, J (Oral)
CM APPL. 11727/2010
This is an application for condonation of delay of 229 days in re-
filing the appeal.
For the reasons stated in the application, delay of 229 days in re-
filing the appeal is condoned.
Accordingly, application stands disposed of.
ITA 844/2010
1. Present appeal has been filed under Section 260A of Income Tax
Act, 1961 (for brevity "Act 1961") challenging the order in Appeal No.
3171/Del/2007 dated 18th December, 2008 passed by the Income Tax
Appellate Tribunal (in short "ITAT").
2. Briefly stated the facts of the present case are that the assessee
had obtained a licence from Nike company for sourcing, marketing and
sale of footwear and apparel of Nike brand in India. In accordance with
the licence agreement, which had been approved by RBI, royalty @
5% of domestic sale was paid for use of trademark Nike. The admitted
position is that assessee was not entitled to use the technical know-how
or trade name after termination of the aforesaid agreement.
3. Both the Commissioner of Income Tax (Appeals) and ITAT have
held in favour of the assessee. The ITAT in the impugned order has
observed as under:-
"15. On considering the submissions of both the parties,
perusing relevant material available on record and carefully
going through the orders of tax authorities below, we are of
the view that since the findings of CIT(A), wherein he observed
that "From the terms of agreement it is quite clear that the
assessee was granted non transferable license to use the trade
mark Nike in connection with sourcing, marketing land sale of
goods. The technical know how and other information for
manufacture of products was to be provided by Nike to the
assessee. It was made clear as per clause 6 of license agreement
that the trade marks, registrations, applications, good will
associated with them would remain exclusive property of
licensor. As per clause 15 it was further provided that in the
event termination of agreement the licensee (i.e. the assessee)
was supposed to deliver within 20 days of termination notice all
the goods and items bearing trade mark, the confidential
information in the form of drawings, designs including the
copies made to the license. It was made clear that the assessee
would not have any right whatsoever to use the technical
information and the trade mark for termination of the
agreement", could not be converted by the ld. D.R. for the
Revenue before us, the CIT(A) in his well reasoned and well
discussed order has rightly deleted the impugned addition
made by the AO by holding that the royalty expenditure
involved in the instant ground of appeal is revenue
expenditure and not capital expenditure....."
4. Ms. Rashmi Chopra, learned counsel for revenue submitted that
the ITAT erred in law and on merits in deleting disallowance of
Rs.90,62,600/- made by the Assessing Officer on account of payment
of royalty paid by the assessee to Nike International Limited.
5. Consequently, the only issue that arises for consideration in the
present proceedings is whether payment of royalty fees by the assessee
is revenue or capital expenditure.
6. It is settled law that if expenditure brings into existence a capital
asset or gives any advantage of enduring nature to an assessee, it can be
treated as capital expenditure. In the present case, both the CIT(A) and
ITAT have concluded that royalty payable was in lieu of use of
technical information provided by Nike Company for manufacture of
products and for use of trademark Nike. According to CIT(A), royalty
payable was related to the sales made during a particular year and
accordingly the expenditure was of revenue nature.
7. Both the CIT(A) and ITAT have given cogent reasons for
arriving at the conclusion that royalty payment was a revenue expense.
Moreover, in our opinion as the assessee ceased to have any right to use
technical information and/or trademark upon termination of agreement,
there was no advantage of enduring nature derived by the assessee from
the said agreement. Consequently, in our opinion, royalty fee is a
revenue and not a capital expenditure. Accordingly, the present appeal
being bereft of merits is dismissed in limine but no order as to costs.
MANMOHAN, J
CHIEF JUSTICE
JULY 14, 2010
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