Tribunal: Payments as Royalty, Excluded Taxes for Deductions

The Tribunal determined that the payments made under the collaboration agreements were classified as royalty and revenue expenditure. The applicability of Section 35AB was dismissed as the payments were for royalty and not technical know-how acquisition. Additionally, excise duty, sales tax, and windmill income were excluded from turnover for Section 80HHC deductions. The appeals were dismissed in favor of the assessee, emphasizing consistency in the Department's interpretation of agreements unless there is a change in law or new material evidence.

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Issues Involved:
1. Nature of payment to foreign company under the collaboration agreement - royalty or fee for technical know-how.
2. Applicability of Section 35AB read with Explanation 2 to Section 9 of the Income Tax Act.
3. Classification of payments as revenue or capital expenditure.
4. Exclusion of excise duty and sales tax from total turnover for Section 80HHC deduction.
5. Exclusion of income from windmill from turnover for Section 80HHC deduction.

Detailed Analysis:

Issue 1: Nature of Payment - Royalty or Fee for Technical Know-How
The Tribunal held that the amount paid by the assessee to the foreign company under the collaboration agreement dated 8.12.1993 is in the nature of royalty and not a fee for technical know-how. The Tribunal interpreted the agreements dated 24.5.1989 and 8.12.1993 as agreements for granting a license to an existing company for manufacturing and selling automobile parts, rather than for setting up a new plant or manufacturing a completely new product. The Tribunal's view was that the payments under these agreements were for the right to use existing technical know-how, making them akin to royalty payments.

Issue 2: Applicability of Section 35AB
The Tribunal concluded that Section 35AB of the Income Tax Act, which pertains to capital expenditure on acquiring technical know-how, was not applicable. The agreements did not provide for any lumpsum payment for technical know-how but only for royalty payments. The Tribunal distinguished this case from the Supreme Court's decision in Jonas Woodhead and Sons (India) Ltd. v. Commissioner of Income Tax, where the payment was for setting up a new factory, thus falling under Section 35AB.

Issue 3: Classification of Payments - Revenue or Capital Expenditure
The Tribunal found that the payments made under the agreements dated 24.5.1989 and 8.12.1993 should be classified as revenue expenditure. The Tribunal noted that the Department had accepted similar payments as revenue expenditure for the assessment years 1986-1987 to 1994-1995. The Tribunal also observed that the payments were for renewing the license to use technical know-how for manufacturing and selling products, which aligns with revenue expenditure.

Issue 4: Exclusion of Excise Duty and Sales Tax from Total Turnover
The Supreme Court's decision in Commissioner of Income Tax v. Lakshmi Machine Works was cited, which held that excise duty and sales tax do not form part of the turnover for the purposes of Section 80HHC. The intention behind Section 80HHC is to provide incentives to promote exports, and since excise duty and sales tax do not emanate from the turnover, they must be excluded. Therefore, this question was answered in favor of the assessee.

Issue 5: Exclusion of Income from Windmill from Turnover
The Tribunal's decision to exclude income from the windmill from the turnover for the computation of deduction under Section 80HHC was upheld. This was based on the precedent set in Commissioner of Income Tax v. Madras Motors Limited, where it was decided that such income should not be included in the turnover for Section 80HHC purposes.

Conclusion:
The appeals were dismissed, and all substantial questions of law were answered in favor of the assessee. The payments under the collaboration agreements were considered royalty and revenue expenditure, and excise duty, sales tax, and windmill income were excluded from the turnover for Section 80HHC deductions. The judgment emphasized consistency in the Department's interpretation of agreements unless there is a change in law or new material evidence.

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