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The disallowance made by the assessing officer on the aforesaid grounds is incorrect, both on facts and in law, for the reasons elaborated hereunder:

a. Brief History and Facts :

The assessee had set up its plant in the year 1984 to manufacture models of motorcycles by using know-how of Honda Motor Co. through Technical Collaboration Contract dated 24th January, 1984. Under that agreement, the assessee was provided with technical assistance not only for manufacture, assembly and service of the products but was also provided with information, drawings and designs for the setting up of the plant. The assessee was required to pay lump sum amount of $5,00,000 in consideration of technical information for construction of plant, which was capitalized in the books of account and no part thereof was claimed as revenue expenditure.

17. In the case of Shriram Pistons & Rings Ltd. Vs. CIT, New Delhi - [2008] 171 Taxman 81 (Delhi), the facts of the case are that the assessee company had entered into a technical collaboration agreement with a Japanese company, 'R' for the manufacture of piston rings. The said agreement mentioned that the technical know-how would be sold by 'R' to the assessee for a fixed amount and the payments would be made on the fulfillment of certain conditions. The agreement enabled the assessee to sub-license the technical know- how to another Indian party subject to the prior written permission of 19 ITA-5130/Del/2010 'R'. The validity of the agreement was for a period of five years, but it could be terminated before the expiry of that period in the event of any default by any of the parties. The agreement laid down that the right of the assessee to market any of the products manufactured under the agreement would cease upon its expiry or termination. Pursuant to the said agreement, the assessee paid certain amount to 'R' and claimed same as revenue expenditure. The lower authorities, relying on the word 'sold' in the agreement, held that it was a case of sale of technical know-how by 'R' to the assessee and, therefore, payment in question could not be treated as revenue expenditure. However, the Tribunal held that there was no sale of technical know- how by 'R' to the assessee and, therefore, the payment was revenue expenditure. It was held as under:-

On the facts and after applying the aforesaid principle, it becomes crystal clear that the expenditure is of revenue nature."

20. In the case of Climate Systems India Ltd. Vs. CIT - [2009] 319 ITR 113 (Delhi), the facts of the case are that the assessee company engaged in the manufacture and sale of heat exchangers (radiators) entered into technical collaboration agreement with a US company to manufacture radiators with technology owned by the US company. Under the agreement, the assessee was permitted to use the technology for manufacture of upgraded radiators for which the assessee was to make a lump sum payment of US $ 1 million to the US company, which was capitalized in the assessee's books of account and a royalty of 3 per cent. of domestic sales and 5 per cent. of export sales to the US company for a period of 7 years for using the technology and for availing of technical services. During the previous year relevant to the assessment year 2002-03, the assessee paid to the foreign collaborators royalty calculated at 3 per cent. of domestic sales and at 5 per cent. of export sales and claimed deduction thereof as business expenditure. The Assessing Officer disallowed it as being of capital nature and this was confirmed by the Commissioner (Appeals) as did the ITAT on the grounds, inter alia, (a) that even after termination of the agreement the assessee could continue to use technical information in production of licensed products and hence the assessee obtained enduring benefit, and (b) that there was nothing to show that any technical service was to be provided on day-to-day or on regular basis at any specified interval and thus it was a case of outright 23 ITA-5130/Del/2010 transfer of technical know-how. On appeal, the Hon'ble Jurisdictional High Court held as under:-

22. Now, we come to the assessee's case so as to reach to the conclusion as to which of the above decisions would be applicable. At the outset, we may mention that the Assessing Officer has heavily relied upon the decisions of the Hon'ble Apex Court in the case of Southern Switch Gear Ltd. (supra) and Jonas Woodhead And Sons (India) Ltd. (supra), for holding that the payment of royalty is capital expenditure. But, the Assessing Officer has not fully applied those decisions because in both the cases, only 25% of the royalty payment was held to be capital expenditure and 75% was allowed as revenue expenditure. Though the Assessing Officer has relied upon those decisions, but he disallowed the entire payment as capital expenditure. Be that as it may, let us look to the facts of the assessee's case. The assessee had set up its plant in the year 1984 to manufacture motorcycles by using know-how of Honda Motor Co.Ltd. ('HMCL') through technical collaboration contract dated 24th January, 1984. Under the agreement, the assessee was provided technical assistance for manufacture, assembly and service of the product and was also provided with information, drawings and designs for setting up of the plant. The assessee was required to pay lump sum amount of $5,00,000 in consideration of technical information for setting up of plant which was capitalized in the books of account and no part thereof was claimed as revenue expenditure. In addition to the above, the 25 ITA-5130/Del/2010 assessee was required to pay certain percentage of sale consideration as royalty year after year. Till AY 1999-2000, i.e. almost for 15 years, the yearly payment of royalty claimed as a revenue expenditure was allowed by the Department. It was for the first time that the dispute arose in AY 2000-01 and then in AY 2000-01, 2001-02 & 2002-03, and the ITAT accepted the assessee's claim which has been discussed by us in detail in the earlier part of our order. In AY 2003-04, 2004-05 & 2005-06, the claim is disallowed by the Assessing Officer but it is stated by the learned counsel that it has been allowed by the learned CIT(A). However, in this year, the Assessing Officer disallowed 100% royalty holding it to be capital expenditure and the same is also sustained by the DRP. Hence, this appeal by the assessee.