Madras High Court
Commissioner Of Income Tax vs M/S.Shriram City Union Finance Ltd on 29 November, 2023
Author: R. Mahadevan
Bench: R. Mahadevan, Mohammed Shaffiq
T.C.A.No.554 of 2023
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED 29.11.2023
CORAM
THE HON'BLE Mr. JUSTICE R. MAHADEVAN
AND
THE HON'BLE Mr. JUSTICE MOHAMMED SHAFFIQ
Tax Case Appeal No.554 of 2023
Commissioner of Income Tax
Chennai .. Appellant
Vs.
M/s.Shriram City Union Finance Ltd.
No.4, Mookambika Complex
Lady Desika Road, Mylapore
Chennai 600 004 .. Respondent
Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961
against the order dated 29.07.2022 passed by the Income Tax Appellate
Tribunal, Chennai 'C' Bench, Chennai, in I.T.A.No.433/Chny/2021.
For Appellant : Mrs.V.Pushpa
For Respondent : Mr.R.Sivaraman
JUDGMENT
(Judgment was delivered by R. MAHADEVAN, J.)
This tax case appeal has been filed by the appellant/Revenue, calling in
question the correctness of the order dated 29.07.2022 passed by the Income
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Tax Appellate Tribunal, Chennai 'C' Bench, Chennai, in I.T.A.No.
433/Chny/2021, relating to the assessment year 2017-18, by raising the
following substantial question of law :
“Whether on the facts and circumstances of the case and
in law, Tribunal was right in holding that the expenditure
incurred by the assessee toward the use of the logo
“SHRIRAM”, in the nature of royalty expenditure is to be
treated as revenue expenditure and to be allowed in full as
claimed by the assessee, without considering the provisions of
Section 32(i) r/w. Explanation 3 amended w.e.f. 01.04.1999
which specifically treats such assets as intangible depreciable
assets of capital in nature and provides for depreciation only
and the assessee had also derived enduring benefit?”
2. When the matter was taken up for consideration, the learned counsel
appearing for the appellant/Revenue fairly submitted that the substantial
question of law raised in this appeal is covered by a common judgment dated
30.06.2022 passed by this court in T.C.A.No.755 of 2009 etc. batch in respect
of the assessee's own case. For ready reference, the relevant portion from the
said judgment is extracted below :
"Substantial question of law No.1 - Royalty :-
“7.7. It is an admitted fact that the assessee companies had
entered into licence agreement with the parent company viz.,
M/s.Shriram Chits & Investments Pvt. Ltd., for use of its logo, on
payment of royalty based on turnover and the same is renewable. As
already stated, it is the claim of the assessee companies that the
license agreement confers the right to use the logo with restrictions
viz., non-transferable and non-exclusive; there is no acquisition and
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there is only the right to use and not ownership; and therefore, the
royalty payment which is revenue in nature, falls within the general
provisions of section 37(1) and not under section 32(1)(ii).
7.8. This court is bound by the legal proposition laid down In
the decision in CIT v. Ciba of India Ltd., (supra) referred to on the
side of the assessee companies. In that case, the Hon'ble supreme
court answered the question, whether the payment made by the
assessee to the swiss company towards technical and research
contribution for the use of its Indian patents and /or trade marks, in
pursuance of an agreement, is an admissible deduction, in favour of
the assessee. Such a conclusion was arrived at, after a detailed
analysis of the terms of the agreement, nature of the expenditure
incurred and the other relevant factors. The following passage
extracted from the said judgment is important:
In the case in hand, it cannot be said that the swiss
company had wholly parted with its Indian business. There was
also no, attempt to part with the technical knowledge absolutely
in favour of the assessee.
“The following facts which emerge from the agreement
clearly show that the secret processes were not sold by the
swiss company to the assessee: (a) the licence was for a period
of five years, liable to be terminated in certain eventualities
even before the expiry of the period; (b) the object of the
government was to obtain the benefit of the technical assistance
for running the business; (c) the licence was granted to the
assessee subject to rights actually granted or which may be
granted after the date of the agreement to other persons; (d)
the assessee was expressly prohibited from divulging
confidential information to third parties without the consent of
the swiss company; (e) there was no transfer of the fruits of
research once for all: the swiss company which was
continuously carrying on research and had agreed to make it
available to the assessee; and (f) the stipulated payment was
recurrent dependent upon the sales, and only for the period of
the agreement. We agree with the High Court that the first
question was rightly answered in favour of the assessee.”
However, it is imperative for this court to apply the law laid down by
the Apex Court to the facts of the present case, to determine the
nature of the royalty payment made by the assessee companies i.e.,
whether it is revenue or capital expenditure.
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7.9. At this juncture, it is apposite to refer to the decision of
the Hon'ble supreme court in CIT v. Wavin (I) Ltd. (supra) which
was referred to by the Tribunal, while passing the orders impugned
herein and it was held by the Hon'ble Supreme court as follows:
“The expenditures were incurred to obtain benefit of
research and development made by the foreign company. The
technical information given to the Indian company was "non-
exclusive" and "non-transferable". In other words, this is not
an out and out sale of technical know-how. The assessee was
merely given a non-exclusive and non-transferable right of user
of the technical information. Expenditures in these facts cannot
be said to be for acquisition of any asset at all.”
7.10. Furthermore, in the judgment of the Supreme Court in
Honda Siel Cars India Ltd v. CIT (supra), it was held that while
deciding, whether royalty payment for technical know-how is capital
or revenue expenditure, the enduring benefit test has to be applied;
and the conditions to be satisfied for treating the expenditure under
technical collaboration, as capital in nature, are (i) there is no
existing business and (ii) agreement is crucial for setting up a new
manufacturing plant. The relevant passage of the said judgment of
the supreme court is usefully extracted below:
“19. If the aforesaid factors are taken in isolation,
probably the claim of the assessee may be justified. Distinction
between capital and revenue expenditure with reference to
acquisition of technical information and know-how has been
spelled out by this Court as well as High Courts in a series of
cases. Primary test which is adopted to differentiate between
capital and revenue expenditure remains the same, namely, the
enduring nature test. It means where the expenditure is
incurred which gives enduring benefit, it will be treated as
capital expenditure. In contradistinction to the cases where
expenditure of concurrent and reoccurring nature is incurred
and the later would belong to revenue field. Technical
information and know-how are intangible. They have a
different and distinct character from tangible assets. When the
expenditure is incurred to acquire a tangible asset,
determination as to whether the said acquisition of tangible
asset is of capital nature or the expenditure is of revenue
nature, may not pose a problem. However, in case of technical
information and know-how, having regard to their unique
characteristic, the questions that need to be posed for
determining the nature of such an expenditure are also of
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different nature. In case where there is a transfer of ownership
in the intellectual property rights or in the licences, it would
clearly be a capital expenditure. However, when no such rights
are transferred but the arrangement facilitates grant of licence
to use those rights for a limited purpose or limited period, the
Courts have held that in such a situation, the royalty paid for
use of such technical information or know-how would be in the
nature of revenue expenditure as no enduring benefits is
acquired thereby. This was so held in a classic case, entitled
CIT v. Ciba India Limited (AIR 1968 SC 1131).”
7.11. Thus, it is crystal clear from the aforesaid decisions of
the Hon'ble supreme court that royalty payment made by the
assessee, for use of logo or trademark for a particular period, for
improvement / expansion of business, would qualify as revenue
expenditure. The Judgment in Honda Siel Cars India Ltd (supra) is
of no assistance to the revenue as in that case, the technical know-
how was shared pursuant to technical collaboration agreement and
not only technical information was transferred, but on field complete
assistance was given pursuant to the joint venture agreement.
Further, in that case, the very same business was set up by the
transferee company. However, in the present case, it is not the case.
The grant of licence to use the intellectual property of the parent
company for limited purpose, cannot be treated as transfer of
ownership or title. Though the licence is renewed periodically, it by
itself does not guarantee the renewal. Similarly, the parent company
is always at liberty to not only cancel the license, but also grants
such rights to any other organization. Further, the findings of the
Apex Court in the above judgment that when the intellectual property
right is not transferred, but permitted to be utilized for a particular
period, would have to be treated as revenue expenditure, on
application to the facts of this case, tilts the balance in favour of the
assessees. Every expenditure incurred to acquire some right over
intangible asset, cannot be ipso facto termed as capital expenditure.
The nature of the assets, right, information or technical know-how
that is transferred, must be such that without which the transferee
could never commence the business. As rightly contented by the
learned senior counsel appearing for the assessees, the benefit
granted by the licensor is not enduring in nature in the present cases.
The assessing officer without appreciating the terms of the licence
agreement and ascertaining the nature of the expenditure incurred by
the assessee companies, disallowed the deduction of royalty payment
and allowed the depreciation at 25% treating it as capital
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expenditure. However, the appellate authorities, while deleting the
disallowances made by the assessing officer, have rightly treated the
royalty payment as revenue expenditure. Once the payment of royalty
is treated as revenue expenditure, automatically, it goes without
saying that the assessees would be entitled to 100% deduction.
Therefore, we need not interfere with the orders passed by appellate
authorities. Accordingly, the substantial questions of law relating to
royalty, are answered in favour of the assessees.”
3. In view of the above, the substantial question of law raised herein is
answered in favour of the assessee and this tax case appeal filed by the Revenue
is dismissed. No costs.
[R.M.D,J.] [M.S.Q, J.]
29.11.2023
Neutral Citation : Yes/No
Index : Yes/No
gya
To
1.The Commissioner of Income Tax
Chennai
2.The Income Tax Appellate Tribunal
'C' Bench, Chennai
https://www.mhc.tn.gov.in/judis
R. MAHADEVAN, J.
AND
MOHAMMED SHAFFIQ, J.
gya
29.11.2023
https://www.mhc.tn.gov.in/judis
