TaxTMI 
TaxTMI 
2008 (2) TMI 456
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.... brought in the Finance Act, 1998, w.e.f. 1st April, 1999 has changed the definition of capital asset. 1.2 The learned CIT(A), has erred in law and on facts in holding that the payment of 'technical know-how', as a capital expenditure due to the fact that it was paid in lump sum. 1.3 The learned CIT(A), has erred in law and on facts in holding that the payment of 'technical know-how', as capital expenditure due to the fact that the AO has allowed the royalty payment as revenue expenditure. 1.4 The learned CIT(A), has erred in law and on facts to understand and appreciate that the 'right to use the technical-know-how' is not a revenue expenditure as has been laid down in various decisions of the Hon'ble Supreme Court and Delhi High Court also. 2.1 The learned CIT(A) has erred in law and on facts in not allowing payment of Rs. 1,65,676 on account of PF on the premise that it was a delayed payment. Prayer: The disallowance of Rs. 22,56,100 on account of technical know-how and Rs. 1,56,676 on account of PF may kindly be deleted as these deserve to be deleted." 4. Briefly stated, the facts relating to the issue involved in ground No. 1 of the appeal of the Revenue in a....
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....tary right and know-how, Shivani was also to pay royalty amounting to 4 per cent of the net sales price. (viii) The clause No. 19 of the agreement stipulates for the secrecy to be maintained in respect of the transfer of know-how, which was for a limited purposes. Shivani was under an obligation that without written approval of Kiekert AG; it could not share the information with any other persons. (ix) Clause Nos. 21 and 22 provided the duration of the contract for 7 years and it could be terminated with the service of notice. It meant that what the assessee received was only 'right to use' the 'technical know-how'. During all the time, the assessee was working under obligation and was being watched and monitored by Kiekert in one way or the other. It has also been paying royalty on its sale of product, which was developed with the use of this technology. 6. The AO disallowed the claim of the assessee of Rs. 27,93,969 in asst. yr. 2000-01 and Rs. 22,56,100 in asst. yr. 2001-02 by observing that in asst. yr. 2000-01 the assessee has written off a sum of Rs. 8,79,071 under the head technical know-how but claimed deduction of Rs. 27,93,969 in the computation of income. The as....
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....but the AO did not deal in his order with reasoning given by the counsel. Referring to the terms in the agreement, learned Authorised Representative for the assessee submitted that it was not a sale agreement because through this license. the assessee company obtained only 'right to use' the technology. The assessee was engaged in the business of manufacturing of door latches for the automobile industry, right from its inception and by obtaining the right to use this technology, the company has only continued with its manufacturing activities in a better way. In support of his claim, the payment, if any, in pursuant to this agreement was only the revenue expenditure; the assessee referred to various clauses of the agreement. He also relied upon case law, referred to in the order of the CIT(A), in support of his contention. 11. On considering the submissions of the assessee, which were based on various clauses in the license agreement, the CIT(A) found that what the assessee got is only right to use the technical know-how hence the payment made by the assessee to the foreign company was a revenue receipt and the impugned payment of Rs. 27,93,969 in asst. yr. 2000-01 was a revenue....
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.... even intangible assets such as technical know-how are entitled to depreciation, as permissible under the rules. Going by the intent of the legislature-as highlighted by the amendments discussed above-there is no doubt that the consideration paid by acquiring technical know-how is not a revenue expenditure. Clause (ii) (identical issue on identical facts) of sub-s. (i) of s. 32 of the IT Act, 1961 read as under: (ii) Know-how patents, copyrights, trademarks, licenses, franchises or any other business on commercial rights of similar nature being intangible assets acquired on or after the 1st day of April 1998. The definition of intangible assets is wide enough to cover the consideration for technical know-how, licenses etc. In the instant case the appellant has not only undertaken to pay DM 5 crores in lump sum (on deferred payment basis) but is also paying the other party royalty on its sales. The AO has allowed the royalty part as allowable revenue expenditure but has treated the lump sum consideration as capital expenditure. This action of the AO is in accordance with law and the case law relied. upon the appellant would be of no help in view of the legal position based on the....
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....td. (2004) 192 CTR (MP) 117 : (2005) 273 ITR 59 (MP); (2) AAA Fun-N-Food (P) Ltd. vs. Jt. CIT (2006) 201 CTR (MP) 479 : (2005) 279 ITR 219 (MP); (3) CIT vs. Drilcos (India) (P) Ltd. (2004) 192 CTR (Mad) 383 : (2004) 266 ITR 12 (Mad). 14. On the other hand, learned Authorised Representative for the assessee, referring to various clauses of the agreement, submitted that in view of the various restrictions placed upon the assessee under different clauses, the assessee did not become exclusively entitled to contractual proprietary rights and the know-how supplied by the Keikert, a German company, and this payment was only made for obtaining access to information to the limited use of know-how and, hence, the same is to be treated as revenue expenditure. In support of his contentions, the learned Authorised Representative for the assessee placed reliance on the following case law: (a) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC); (b) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC); (c) CIT vs. British India Corporation Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC); (d) CIT vs. Indian Oxygen Ltd. (1996) 134 CTR (SC) 3....
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.... Ltd. (1997) 94 Taxman 314 (Del)(Mag); (e) Hero Honda Motors Ltd. vs. Jt. CIT (2005) 95 TTJ (Del) 782 : (2006) 103 ITD 157 (Del) (Department's appeal dismissed by Delhi High Court); (f) Eicher Motors Ltd. vs. Dy. CIT (2004) 82 TTJ (Ind) 61. [Department's appeal dismissed by Madhya Pradesh High Court, reported in (2008) 214 CTR (MP) 629 : (2007) 293 ITR 464 (MP)]. 16. Similarly referring to depreciation on technical know-how as provided in s. 32 of the Act, learned Authorised Representative for the assessee submitted that the word 'owned' used in s. 32 requires that an assessee must have exclusive ownership and control over the technical known-how in its own right and not in the right of others and since the assessee in view of the terms and conditions of the agreement did not have exclusive right over the technical know-how it cannot be said to be owning the same for bringing the expenditure within the purview of capital expenditure. In support thereof, learned Authorised Representative for the assessee relied upon Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC). Learned Authorised Representative for the assessee has also filed before us the....
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....e termination of the contract, would again by itself, cannot result in the payment being treated as capital expenditure; and (7) the entries in the books of account are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. [Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC)]. 19. The reference to s. 35AB of the Act and the case law by the learned Departmental Representative for the Revenue as well as by CIT(A) in the order passed for asst. yr. 2001-02 and asst. yr. 2000-01, under consideration before us, in coming to a conclusion regarding the benefit of amortization of lump sum expenditure incurred by the assessee on technical know-how under s. 35AB being revenue or capital in nature, are now of no relevance because the benefit of amortization of expenditure allowable to the assessee on expenditure of technical know-how under s. 35AB was discontinued by the Finance Act, 1998 w.e.f. 1st April, 1999, and is no longer applicable for asst. yrs. 2000-01 and 2001-02. On the same reasoning, in our opinion, the case law relied upon by the learned Authorised Representative for the asses....
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....y for the product used by these manufacturers. 7. Sub-licenses Shivani is not entitled to grant sub-licenses......... 10. Competition clauses Shivani undertakes for the term of this contract not to enter into any other reproduction and/or sales contracts with companies whose products compete with the subjects of the contract and whose head office is situated outside the contractual territory, during the validity period of this contract.......... 12.1 License and know-how lump sum Kiekert will charge Shivani and Shivani undertakes to pay to Kiekert DM 50,00,000 for the transfer of the rights to use the contractual proprietary rights and the know-how, for the supply of the technical documentation and the technical support and training given by Kiekert. 19. Secrecy Both parties undertake not to pass on any information concerning this contract in either written or oral form to third parties without the written approval of the other party. This obligation shall remain in force until expiration of the second year after the termination of the contract......... 21. Duration of the contract The duration of this contract shall be 7 (seven) years and will star....
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....e clauses regarding the use of technical know-how received by the assessee from the German company. Even the preface of the contract suggests that the assessee only acquired a license for a limited right to use of the know-how as is clear from cl. 12.1 of the agreement. Thus, in view of the various restrictions placed upon the assessee under different clauses i.e. that the German company reserves the right to supply the technical know-how to other car manufactures in India either directly or indirectly or through Shivani without any restriction; that such services could also be extended to other manufacturers in India either by German company or jointly with the assessee if it delivers a proper quality at the right places; that the assessee is not entitled to grant/provide sub-license of this technical know-how; that the German company was to furnish blue prints and drawings to assessee; that the assessee was also-required to pay royalty on the net sales price; that the secrecy was to be maintained in respect of transfer of know-how and that the assessee could not share the information with any other person except with the written approval of the German company; that duration of th....
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....d Rs. 1,59,677 and Rs. 1,65,676 under s. 43B of the Act and s. 2(24)(x) r/w s. 36(v)(a) of the Act. 26. Aggrieved with the order of the AO, the assessee filed an appeal before the CIT(A). 27. On considering the submissions of the assessee, the learned CIT(A) allowed a relief of Rs. 1,59,677 and sustained the addition of Rs. 1,65,676 made by the AO by making following observations in his order: "As per provisions of r. 164 of Manual of Accounting Procedure of the Employees Provident Fund Organization, an employer is not treated to be in default if the contributions are remitted within the grace period. In such a situation, where an employer is not being penalized under the relevant statute i.e. Provident Fund law-as in this case, it would not be fair to deny him the benefit by treating him in default if the deductions are deposited within the grace period. Reliance is placed on the decisions of Hon'ble Madras High Court in the case of CIT vs. Salem Co-operative Spinning Mills Ltd. (2002) 258 ITR 360 (Mad) as well as another judgment of the Hon'ble Madras High Court in the case of CIT vs. Shanker Spinning Mills (p) Ltd. (2003) 181 CTR (Mad) 328 wherein the Hon'ble Courts hav....