TaxTMI 
TaxTMI 
2010 (12) TMI 801
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....(PGI) towards technical know how fees in assessment year 1994-95. The assessee had amortized the expenditure over a period of six years and claimed deduction of Rs.33,33,333/- being 1/6 th of the payment during the year. The same issue had arisen in assessment years 1995-96 and 1996-97 in which the AO noted that the assessee was only a trading company and not a manufacturing company and therefore it could not be said to have received any technical know how from PGI and accordingly disallowed the claim. Following the reasons in earlier years the AO disallowed the claim in this year also as the claim related to the same technical know how agreement entered into in the earlier year. In appeal, CIT(A) following the decision in earlier year confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal. 2.1.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the issue is covered by the decision of the tribunal in assessee's own case in assessment years 1994-95, 1995-96 and 1996-97 in ITA Nos.5153/M/98 and 5687-5688/M/99. In the said years tribunal observed that though the assessee had not itself ma....
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....d that no tax had been deducted at source. We find that the same issue had already been considered by the tribunal in assessee's own case in assessment years 1994-95 to 1996-97 in ITA No.5153/M/1998 and 5687-5688/M/1999. The assessee in the said years argued that all the services in connection with advertisement had been rendered outside India and payment had also been made to the bank account situated outside. The income of the foreign telecasting companies therefore was not taxable in India and no tax was required to be deducted. The assessee also submitted that the circular No.742 of the CBDT was not applicable for the period A.Y.1995-96 and earlier years. The assessee further pointed out that the authorities below had not considered the circular No.23 dated 23.7.69 of the CBDT. Considering all these factors, the tribunal had set aside the order of CIT(A) and restored the matter to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. Identical facts are involved in this year also. We therefore set aside the order of CIT(A) and restore the issue to the file of AO for passing a fresh order after necessary e....
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....al expenditure. CIT(A) has held that claim has to be allowed, whether capital or revenue, within the limitation provided under Rule 6B. The assessee has challenged the order of the CIT(A) and argued that the claim is allowable without any limitation. We find that the issue raised in this ground is covered by the decision of the Mumbai Bench of the tribunal in case of DCIT vs Metro Shoes Pvt. Ltd. (258 ITR 106 (AT) In that case the assessee who was a trader in footwear had produced a video film for advertising the product on TV and claimed the expenditure as revenue expenditure which had been disallowed by the AO as capital expenditure. In appeal the tribunal observed that the public interest like public memory had a short span of life and in order to keep the mass interest intact in the products, the assessee had to continuously strive to keep on advertising its products in ever increasingly novel ways and method through the media. The expenditure incurred on production of advertisement film was therefore held to be allowable as revenue expenditure. The said decision had been followed by the tribunal in case of Procter and Gamble Distribution Co. Ltd., another group company of the ....
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....Global compressor manufacturer, the assessee had purchased the compressor related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor market. The assessee had paid the price of Rs.52.5 crores which included a sum of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non compete fees which was in force for 5 years, could be allowed as revenue expenditure. The Special Bench after detailed examination held that the expenditure was capital in nature. It placed reliance on the judgment of Hon'ble Supreme Court in CIT vs Coal Shipment Pvt. Ltd. (82 ITR 902) in which it was held that payment to ward off completion in business to a rival dealer would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating competition over some length of time. The Special Bench also observed that non compete period of five years had been considered as sufficient to give enduring benefits in case of Assam Bengal Cement Co. Ltd. (27 ITR 34). In that case, the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.50....
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....800 tons of detergent bars per month at the agreed price. The agreement was to remain in force till 31.3.97. However subsequently, the Joint Venture Agreement with Godrej was terminated on 23rd July 96 and in consequence thereof, all other manufacturing agreements were automatically terminated under the provisions of the clause 14.6 of the joint venture agreement. The assessee submitted before AO that a sum of Rs.7 crores had been paid by the assessee to GSL for early termination of the manufacturing agreement. It was pointed out that the compensation paid was for loss of sales and profits by GSL as well as for loss of capacity utilization. The assessee also submitted that the agreement had to be terminated due to change in the detergent market in India. AO however did not accept the contentions raised. It was observed by him that the real reason for paying huge amount was the termination of joint venture agreement. Therefore the payment related to restructuring and reorganization of the frame work of existing business and profit making apparatus of the PandG group and therefore was capital in nature. The AO placed reliance on the judgment of Hon'ble High Court of Mumbai in case of....
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.... thus for removing commercial constraints. It was also submitted that only the manufacturing agreement for production of TRILO brand of Godrej had been terminated and the assessee had several other contract manufacturing agreements and therefore the termination had not affected the profit earning apparatus. The advantage was thus only in the revenue field and the expenditure had to be allowed as revenue expenditure. He placed reliance on the following judgments in support of the case. (i) 86 ITR 549 (SC) in case of CIT vs Ashok Leyland Ltd. (ii) 107 CTR 240 Kol in case of Pieco Electronics and Electricals Ltd. (iii) 223 ITR 112 (Kar) CIT vs Motor Industries Co. Ltd. (iv) 114 ITR 110 (Mum) CIT vs Glaxo Laboratories (I) (P) Ltd. (v) 77 ITR 140 (Mum) Western India Oil Distributing Co. Ltd. vs CIT 2.5.3 The Learned DR on the other hand argued that the payment made by the assessee was not for termination of the manufacturing agreement. The said agreement it was pointed out had emanated from the main joint venture agreement dated 16.12.92 under the provisions of clause 9.3 of the joint venture agreement. Further clause 14.6 of t....
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....he assessee w.e.f. 1.11.93. As per the agreement the assessee had agreed to buy from GSL 1800 tons bar of detergent per month at the agreed price. The agreement was in force till 31.3.97. The JV Agreement between the two groups was however terminated on 23.7.96. Under the provisions of clause 14.6 of the JVA, in case of termination of JVA, all agreements emanating from the JVA were to automatically cease. The case of the assessee however is that the manufacturing agreement was prematurely terminated on 30.7.96 to remove commercial constraints and the payment of Rs.7 crores had been made to GSL to compensate for loss of sale and profit and loss of capacity utilization. It has also been submitted that the agreement terminated was for manufacture of Trilo brand and it was one of many such agreements by the assessee for manufacture of different products. The termination did not therefore have any impact on the profit earning apparatus and the advantage derived from the assessee was only in the revenue field. It has been pointed out that after the termination, sales and profit both had improved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure.....
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.... can be considered as revenue expenditure in case of the assessee. A careful perusal of the JVA shows that it was not a mere trading agreement. It provided for creation of joint venture company between PandG group and Godrej group namely PGG in which the PG group was to hold 51% equity. PGG had been formed for manufacture of synthetic detergent bar and to market, sale and distribute toilet soap. The JVA also provided for different manufacturing agreements between GSL and different entities of P and G group for manufacture of different products. Further the JVA was for an unlimited period and could be terminated only in case of insolvency and bankruptcy and liquidation of either of the party and for breach of any terms and conditions of the JVA. Admittedly none of the terms and conditions of the JVA had been violated by either of the parties. Thus the JVA provided for a long term business framework and profit earning apparatus of the P and G group. With the termination of the JVA, the JV company as well as other manufacturing agreements automatically ceased to exist. The termination of JVA was thus obviously a part of restructuring and reorganization of the profit earning apparatus ....
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...., the assessee was originally importing and assembling motor cars, parts etc. manufactured by Austin of England. The assessee had appointed CB Ltd. as managing agent for Austin cars. With government allowing setting up of automobile industry in India, the assessee in 1954 took up manufacturing of Leyland commercial vehicle and stopped manufacturing of Austin cars. In 1955 the assessee terminated the managing agency on payment of Rs.2.5 lacs. The issue was nature of expenditure on account of the said payment and it was held as revenue expenditure. It is obvious that the termination of managing agency did not have anything to do with the stoppage of manufacturing of Austin car which had already been stopped nor did it have anything to do with the manufacture of Leyland commercial vehicle. After the assessee stopped manufacturing Austin cars, the managing agency had become redundant. Thus the termination of managing agencies did not relate to the profit earning apparatus of the assessee and by termination the assessee could only gain advantage in the revenue field by way of saving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termina....
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....obviously distinguishable. In the present case the JVA as pointed out earlier was a long term asset and constituted the profit earning apparatus in case of the assessee. 2.5.11 In case of CIT vs Pecio Electronic and Electrical Ltd. (107 CTR 240), the assessee had contract for manufacture of goods with M/s. Vulcan Industries since November 1971. In 1975 the assessee stopped lifting goods from that party and paid compensation of Rs.4,03,000/- for breach of contract. The High Court held that the payment had been made for premature termination of a trade agreement which was creating an onerous burden on the assessee. The termination only avoid future commercial inconvenience and therefore the expenditure was held allowable as revenue expenditure. In the present case as we have pointed out earlier the payment had been made for termination of JVA which was not a mere trade agreement. It provided for long term business framework and profit earning apparatus for the P and G group and therefore the termination did affect the profit earning apparatus. 2.5.12 In case of CIT vs Glaxo Laboratories (India) Pvt. Ltd. (114 ITR 110), the assessee had an agreement for the purpose....
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....ould be for carrying on of the business and the expenditure will be allowable as revenue expenditure. Reliance was also placed on the judgment of Hon'ble Supreme Court in case of CIT vs Delhi Safe Deposit Co.Ltd. (133 ITR 756) and the judgment of Hon'ble High Court of Mumbai in case of Krishna Sahakari Sakher Karkhana Ltd. vs CIT (229 ITR 577) in which the ratio laid down by the Hon'ble Supreme Court in case of Malayalam Plantation Ltd. (supra) had been followed. The AO however did not accept the contentions raised. It was observed by him that the real reason for making the payment was the termination of JVA and therefore the payment related to restructuring and reorganization of the framework of assessee's business and its profit making apparatus and the payment therefore related to the domain of capital expenditure. AO referred to several judgments in support of his conclusion. 2.6.1 The AO also observed that the payment had been made for the undertaking by GSL to not manufacture and process the anti bacterial germicidal soap with the formulation of 0.95% TCC and 0.5% TCS (brand name safeguard) and for not using the confidential information to anyone. The payment was th....
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....the JV agreement clearly provided that none of the parties would disclose business and technical information to any other party. Therefore there was no need for entering into such agreement for getting information relating to 'safeguard' soap confidential. Moreover under the agreement, GSL had not only agreed to keep the information confidential but also not to use such information directly or indirectly to manufacture, market and sale of the 'safeguard' soap. Therefore the true nature of the payment was to ward off competition and the expenditure was therefore capital in nature. CIT(A) accordingly confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal. 2.6.3 Before us the Learned AR for the assessee reiterated the submissions made before lower authorities that the payment had been made to safeguard the confidential information relating to anti bacterial and germicidal soap which was an asset to the assessee. The payment was therefore for protection and preservation of an asset and which had to be allowed as revenue expenditure. It was further argued that the AO was not correct in concluding that the payment related to the framework of ....
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.... if the confidential information was required to be maintained, the payment was of the nature to ward off competition which was not allowable as revenue expenditure. The Learned DR also argued that in case the payment was treated as expenditure in connection with launch of a product which did not materialize, there were several judgments as per which such expenditure has to be disallowed as capital expenditure. Reliance was placed on the following judgments. (i) 196 ITR 237 (Guj) Saurashtra Cement and Chemical Industries Ltd vs CIT (ii) 207 ITR 239 (Guj) McGAW Ravindra Industries vs CIT (iii) 243 ITR 348 (Mad) CIT vs WS Insulation of India Ltd. 2.6.5 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding nature of payment of Rs.21 crores made by the assessee to GSL under "safeguard confidentiality agreement". The case of the assessee is that during the operation of the JVA with Godrej the assessee had developed plans to launch 'safeguard' an anti bacterial germicidal soap with dog bone shape. As per the assessee, the product was developed for launch in Indian market and under....
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....bacterial germicidal soap. However, no such manufacturing agreement and technical assistance agreement has been placed on record. Nor there is any material placed on record to show that there was any exchange of confidential information between the assessee and GSL in relation to development of any anti bacterial soap. To a query by the bench at the time of hearing of the appeal the Learned AR for the assessee admitted that there was no further material available with the assessee other than those placed in the paper book which does not contain any such manufacturing agreement or exchange of confidential information. It is therefore not established that GSL had acquired any confidential information for which the assessee had to make payment for protecting the information. As the purpose of payment is not established the expenditure cannot be allowed as incurred wholly and exclusively for the purpose of business. 2.6.7 Secondly, even if it is assumed that the GSL did become privy to any such confidential information, the payment as per the confidentiality agreement had been made for undertaking from GSL not to manufacture and process any anti bacterial germicidal soap (saf....