2006 (3) TMI 59 - AT - Income Tax

Tribunal Rules in Favor of Assessee, Allowing Deduction for Technical Know-How Expenses

MERCEDES BENZ INDIA LTD. Versus JOINT COMMISSIONER OF INCOME-TAX

MERCEDES BENZ INDIA LTD. Versus JOINT COMMISSIONER OF INCOME-TAX - [2007] 294 ITR (AT) 372 (Pune), ITD 111, 307, Issues Involved:1. Disallowance of technical know-how expenses under section 35AB of the Income-tax Act, 1961.2. Jurisdiction of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of technical know-how expenses under section 35AB:The assessee claimed deductions under section 35AB for technical know-how expenses for the assessment years 1996-97 and 1997-98. The Commissioner of Income-tax-TI disallowed these deductions, arguing that they did not qualify as expenditures under the Income-tax Act. The technical know-how was provided by Daimler Benz AG as part of its share capital contribution to the assessee-company, incorporated on November 22, 1994. The total cost of the technical know-how was Rs. 101,37,59,928, with Rs. 79,54,28,000 in equity shares and Rs. 21,83,31,920 in cash.The Commissioner of Income-tax argued that the Assessing Officer erroneously allowed the deduction, referencing the Supreme Court case of Eimco K. C. P. Ltd. v. CIT [2000] 242 ITR 659, which held that technical know-how contributions as part of capital contributions did not constitute allowable expenditures. The Commissioner issued a show-cause notice, incorporated the assessee's submissions, and discussed several case laws. He concluded that the technical know-how contribution did not involve any expenditure in the trading sense and therefore was not deductible under section 35AB. However, the Commissioner accepted that the cash payment for technical know-how was deductible.2. Jurisdiction of the Commissioner of Income-tax under section 263:The Commissioner of Income-tax invoked section 263, arguing that the Assessing Officer's allowance of deductions under section 35AB was erroneous and prejudicial to the interests of the Revenue. The assessee's representative argued that the Assessing Officer's order was not erroneous as it was based on a proper consideration of facts and applicable laws. The representative highlighted a previous order by the Commissioner of Income-tax (Appeals)-III, Pune, which quashed a reopening under section 147 based on the same precedent, arguing it was a change of opinion.The Tribunal noted that the primary issue was whether the payment for technical know-how after the company's incorporation and the start of manufacturing was eligible for deduction under section 35AB. The Tribunal emphasized that section 35AB allows deductions for lump sum payments for acquiring know-how for business purposes, regardless of whether the payment was in cash or shares.The Tribunal also addressed whether the Commissioner could exercise jurisdiction under section 263 when two possible opinions existed. It cited case laws, including Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) and CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom), which held that an order is not erroneous if it is based on one of the permissible views in law. The Tribunal concluded that the Commissioner's invocation of section 263 was not justified as the Assessing Officer's order was not erroneous.Conclusion:The Tribunal quashed the impugned orders for both assessment years, ruling in favor of the assessee. The appeals filed by the assessee were allowed.