2008 (4) TMI 273 - HC - Income Tax

Court rules in favor of Assessee on revenue and business expenditure issues

The court ruled in favor of the Assessee on all three issues. The payment made to Riken Piston Rings Inds. Co. Ltd. was considered revenue expenditure, ... Technical collaboration agreement for manufacture – there was no sale of technical know-how but there was transfer of only a right to use the technical know-how – hence payment made by assessee should be treated as revenue expenditure – further, gifts given by dealers (of assessee) to customers are not in nature of advertisement, hence would not fall within the financial limits as laid down u/r 6B – “GOOD WORK REWARD” doesn’t amount to bonus, hence deductible u/s 37(1) not u/s 36(1)(ii) Issues Involved:1. Whether the sum paid by the assessee to M/s. Riken Piston Rings Inds. Co. Ltd., Tokyo is revenue expenditure.2. Whether the expenditure on gifts was of the nature of advertisement falling within the purview of Section 37(3) of the Income-tax Act read with Rule 6B of the Income-tax Rules or was of the nature of a trade discount.3. Whether the payments made by the assessee to its employees under the nomenclature 'Good Work Reward' constitute bonus within the meaning of Section 36(1)(ii) of the Income-tax Act, 1961 and are allowable as normal business expenditure under section 37.Issue-Wise Detailed Analysis:1. Revenue Expenditure for Payment to Riken Piston Rings Inds. Co. Ltd.The first issue concerns whether the amount paid by the Assessee to Riken Piston Rings Inds. Co. Ltd. was a revenue expenditure. The Assessee entered into a Technical Collaboration Agreement with Riken for the manufacture of piston rings, involving comprehensive technical know-how and technical assistance. The agreement's critical clauses included the definition of 'know-how', the consideration for the know-how, and the confidentiality and sub-licensing provisions. The court examined whether the agreement constituted a sale of know-how or merely a right to use it. Citing precedents like Commissioner of Income Tax vs. Ciba of India Ltd. and Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, the court concluded that the agreement did not result in an absolute transfer of rights but merely allowed the Assessee to use the technical know-how for a limited period. Therefore, the payment made by the Assessee was deemed a revenue expenditure. The court answered this question in favor of the Assessee and against the Revenue.2. Nature of Expenditure on GiftsThe second issue pertained to whether the expenditure on gifts was of the nature of advertisement under Section 37(3) of the Income-tax Act read with Rule 6B of the Income-tax Rules or was a trade discount. The court noted that the gifts were given by the dealers of the Assessee to their customers, with the Assessee reimbursing the dealers. Since the gifts did not bear the Assessee's logo or name and did not emanate from the Assessee's coffers, they had no advertisement value. Referring to Commissioner of Income Tax vs. Indian Aluminium Cables Ltd.(No.2) and Commissioner of Income Tax vs. Modi Spinning and Weaving Mills Co. Ltd., the court held that the gifts did not fall within the category of 'advertisement' as understood for the purposes of Rule 6B. Consequently, the court answered this question in favor of the Assessee and against the Revenue.3. 'Good Work Reward' as BonusThe third issue was whether the 'good work reward' given by the Assessee to its employees constituted bonus within the meaning of Section 36(1)(ii) of the Income-tax Act and was allowable as normal business expenditure under section 37. The court noted that the 'good work reward' did not fall into any recognized categories of bonus under industrial law, such as production bonus, contractual bonus, customary bonus, or profit-sharing bonus. Citing Commissioner of Income Tax vs. Kelvinator India Ltd. and Commissioner of Income Tax vs. Autopins (India), the court concluded that the 'good work reward' was not related to the company's profits but was an ex gratia payment for good work done by the employees. Therefore, it did not fall within the ambit of Section 36(1)(ii) but was allowable as business expenditure under Section 37. The court answered this question in favor of the Assessee and against the Revenue.Conclusion:The reference was disposed of with all three questions answered in the affirmative, in favor of the Assessee and against the Revenue.