When your company licenses IP it doesn’t own and pays royalties for it, is that a fully deductible revenue expense — or partly capital? The answer turns on one question: who keeps the know-how? The Sicpa India ruling clarifies.
The question
IP rights are among a company’s most valuable assets. But how are they taxed — and what happens when you license and pay royalties for IP you don’t own? A ruling of the Income Tax Appellate Tribunal (Kolkata) in Sicpa India Private Limited v. Assessee addressed exactly this.
The facts
Sicpa India entered a collaboration agreement with a foreign IP holder to manufacture security printing inks for banknotes and securities, and to sell them. The foreign company granted Sicpa an exclusive, non-transferable right to manufacture in India and a non-exclusive right to sell in India — in return for royalty.
The question: was that royalty entirely revenue expenditure (fully deductible), or should part be treated as capital?
The arguments
- Revenue office: Sicpa overclaimed — 25% of the royalty should be capital, relying on the Supreme Court in Southern Switch Gear Ltd v. CIT: the “right to manufacture certain goods exclusively in India… was of an enduring nature,” so the whole royalty couldn’t be revenue, and 25% would be capital.
- Sicpa: it held no rights over the IP other than the licence, so no part of the royalty was capital.
The ruling
The Tribunal held it settled (per Southern Switch Gear and Calcutta High Court cases) that if the know-how remains the licensing company’s property — i.e. there’s no outright transfer of know-how to the licensee — the royalty is revenue in nature. Since Sicpa only licensed the IP (the know-how stayed with the foreign company), its royalty was revenue expenditure — fully deductible.
Why it matters
IP rights carry commercial and tax implications far beyond filing or registering them. The character of a royalty — revenue vs capital — depends on whether the underlying know-how is transferred or merely licensed. Structure the deal knowingly:
- a pure licence (know-how retained by the owner) → royalty is generally revenue expenditure;
- an outright transfer of an enduring right → part may be treated as capital.
The takeaways
- Licence ≠ transfer. If the know-how stays with the owner, royalties are revenue expenditure.
- Enduring rights can go capital — an outright transfer of an exclusive, enduring right may attract capital treatment (Southern Switch Gear).
- The Sicpa ruling favours licensees — a genuine licence keeps royalties fully deductible.
- Structure deals with tax in mind — the wording of the IP arrangement drives the tax outcome.
Frequently asked questions
Is an IP royalty payment revenue or capital expenditure in India? Generally revenue expenditure where the underlying know-how remains the licensor’s and is merely licensed — as held in Sicpa India — but an outright transfer of an enduring right may attract partial capital treatment.
What did the Sicpa India ruling decide? That royalty paid by a licensee is revenue expenditure (fully deductible) where the know-how stays the property of the licensing company, with no outright transfer.
How did the Tribunal distinguish Southern Switch Gear? Southern Switch Gear involved an enduring exclusive right (part capital); Sicpa only licensed the IP, so no know-how was transferred and the royalty was revenue.
Why does the licence-vs-transfer distinction matter for tax? It determines whether the royalty is fully deductible revenue expenditure or partly capital — so the deal structure directly affects the tax outcome.