Delhi High Court
Cit vs Federal Mogul Tpr. India Ltd. on 24 July, 2012
Author: S.Ravindra Bhat
$~2
* IN THE HIGH COURT OF DELHI AT NEW DELHI
DECIDED ON: 24.07.2012
+ ITA 397/2012 & CM APPL.11598/2012
CIT ..... Appellant
Through: Mr. Sanjeev Sabharwal, Sr. Standing
Counsel with Mr. Puneet Gupta,
Jr. Standing Counsel.
versus
FEDERAL MOGUL TPR INDIA LTD ..... Respondent
Through: Mr.Arta Tarana Panda, Advocate
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT)
%
CM APPL.11598/2012
Allowed subject to all just exceptions.
ITA 397/2012
1. The Revenue is aggrieved by an order of the Income Tax Appellate
Tribunal (ITAT) dated 30th September, 2011 whereby its Appeal against the order
of the Ld. CIT (Appeals)-XIII, New Delhi was dismissed.
2. The impugned order upheld the view of the CIT (Appeals) vis-à-vis, the
amounts calculated @ 3% of the net ex-factory sale price paid as royalty to
Telkoku Piston Ring Company Ltd., in accordance with its agreement.
ITA-397/2012 Page 1
3. The reasoning of the Tribunal shows that it distinguishes the decision of
the Supreme Court relied upon by the Revenue, in the case of Southern
Switchgears Ltd. 232 ITR 359(SC). In that case the Supreme Court had disallowed
expenditure of 25% of the royalty actually paid. The Tribunal relied upon the
decisions of this Court in case of CIT v. Sharda Motor Industries Ltd. 319 ITR
109 (Del) and CIT v. J.K. Synthetics Ltd. 309 ITR 371 (Del).
4. In Para 6 of the impugned order, the Tribunal's reasoning can be found.
The relevant extracts are as follows:-
"6. We have heard both the parties and gone through the material
available on record. As per clause 5 of agreement between the assessee and
Telkoku Piston Ring Company Ltd., Japan (supra), the royalty is to be paid at the
rate of 3 per cent of the sale price of the licensed products subject to certain
adjustments. The ld. CIT (A) has examined the agreement and had observed that
the license granted by Telkoku Piston Rings Ltd. was non transferable and non-
assignable. Under clause 6.1 the assessee had agreed that during the terms of
agreement, for 3 years after termination thereof all the information disclosed by
Telkoku Piston Rings Ltd. shall be maintained by the assessee in confidence and
will not be disclosed to its employee or supplier only to the extent necessary to
permit the assessee to design and manufacture its products and the assessee will
take every precaution to ensure that no information is otherwise disclosed by its
employees and suppliers to other parties. From the terms of the agreement the ld.
CIT (A) came to the conclusion that technical information and patents provided by
foreign collaborator to the assessee were in the nature of license which provided
access to technical knowledge and it was not an absolute transfer of technical
knowledge and information in favour of the assessee. Further the terms also
contained prohibition in parting with the confidential information received by the
assessee under license to third parties. Therefore, the technical information and
patents provided by the foreign collaborator could not be treated to have been
transferred to the assessee. The assessee received right to use the same for the
purpose of business. Hon'ble Delhi High Court in the case of CIT v. Sharda
Motor Industries Ltd. (supra) has held that the payment of royalty at the rate
calculated per piece of production was revenue expenditure. Similarly Hon'ble
Delhi High Court in the case of J.K.Synthetics (supra) has held that amounts paid
for process and technical know-how, supply of technicians and training of
personnel was in the nature of revenue expenditure. Since in the instant case
assessee had right to access the technical knowledge as against absolute transfer
of technical knowledge and information and the payment for which has been made
on turnover basis, the expenditure has to be treated revenue in nature. Therefore,
in our considered opinion, the ld. CIT (A) has rightly allowed the claim of the
ITA-397/2012 Page 2
assessee as revenue expenditure in both the years."
5. In the present case, royalty amount is to be paid as 3% of the net ex-
factory sale by the licensee/assessee. The Tribunal, however, came to the
conclusion that for transfer of technical knowledge and information and on proper
examination of this Court's decision in CIT v. Sharda Motor Industries Ltd. the
amounts were deductable. This Court is not persuaded that any question of law
arises for consideration, the appeal is accordingly dismissed.
S. RAVINDRA BHAT, J
R.V.EASWAR, J
JULY 24, 2012
vk
ITA-397/2012 Page 3
