TaxTMI 
TaxTMI 
2011 (12) TMI 351
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....td for manufacture of certain special form of denim fabrics. BMI was engaged in the business of producing and selling denim in many parts of the world. Similarly MIL, though it was not engaged in the manufacture of denim, had certain technical knowledge and trade mark in the production and sale of quality fabrics. Both entered into the joint venture for manufacture and sale of specialized denim fabrics. The joint venture was incorporated on 08.09.1995. Subsequently, the assesee, BMI and MIL entered into a Shareholders agreement dated 17.10.1995, for formation and capitalization of the assessee company. Later, the Department of Industrial Policy and Promotion (DIPP) vide letter dated 14.12.1995 granted approval to the joint venture for 50% Foreign Equity Participation of Rs.21.25 crores out of the total paid up equity capital of Rs.42.50 crores. It also approved the lumpsum technical knowhow fees of USD 7.50 lakhs, license and technology fees @ 4% and commission @ 3% of net sales to BMI in respect of sales made through the latter. The approval given by DIPP also stipulated that the duration of the technology collaboration would be 10 years from the date of agreement, or 7 years from....
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....sole discretion would be necessary for the manufacture or sale of the Products by the Company. 3.2 The provisions for granting of license are made in para 2.1 of the agreement which reads as under: 2.1 Grant of License: Subject to the terms and conditions of this Agreement, BMI hereby grants to the company, for the effective term of this Agreement, the (i) exclusive, non transferable license with no right to sublicense, to use the Technical Information in connection with the manufacture of the Products in India (provided that they shall only be manufactured by the Company at the Facility), and (ii) non exclusive, non transferable Iicense, with no right to sublicense, to use the Technical Information in connection with the sale of Products solely in accordance with the terms and conditions of Clause 7 of the Shareholders Agreement. 3.3 The provisions for license to use the trade mark is contained in para 6.2. The provision for payment of license fees is made in para 7.1, which is also reproduced below for ready reference: 7.1 License Fees (a) In consideration of the rights and licenses granted herein to the Company by BMI and the ....
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....e following (i) the sale or transfer by BMI of any of the shares owned by BMI other than to an affiliate of BMI ("BMI shares sale") (ii) the sale or transfer by Mafatlal of any of the shares owned by Mafatlal other than to an affiliate of Mafatlal ("Mafatlal Shares Sale"), (iii) the sale of substantially all of the assets and business of the company, whether as a sale, lease or other disposition or the merger or consolidation of the company with or into a third party ("Company Sale"); or (iv) the Company is dissolved, liquidated, declared insolvent or bankrupt or has all or a substantial portion of its assets expropriated by any government ("Company Dissolution"). 9.4 Effect of Termination, Entry into New License Agreement: (a) Upon termination of this agreement for any reason, the company shall cease using the trademarks and the name "Burlington" as part of the Company's name and comply with the provisions of paragraph 6.5 hereof. Except as provided in paragraph 9.4 (b) below, upon the termination of this agreement, the company shall immediately (1) cease using the technical information other than in connection with finishing work-in-progress and filling orders....
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....e. The assessee submitted that the Clause 5.2 of the agreement clearly provided that Technical Information was proprietary and confidential information of BMI. Further, the agreement was only for licensing of the technical information and trade mark for use in the business and there was no transfer of technical information or the trade mark. The AO was, however, not satisfied by the explanation given. It was observed by him that the license and technology fees had been paid to BMI and MIL for the following services: 1. License to use name/trade mark. 2. Technical information in connection with the manufacture of products and marketing. 3. Such other technical assistances, for which specialized technician or other personnel need to be deployed specially for implementation and use of technical information in relation to the manufacturing and sales. 4.1 The AO further observed that, in the relevant years, there was no reimbursement of expenses for deployment of personnel of both the companies for providing any technical assistance and, therefore, the entire payments in the form of license and technical fees had to be considered for the use of tr....
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....of the normal depreciation, as the payments had been made towards the end of the year. The balance amount after deducting the depreciation of Rs.4,62,057/- which came to Rs.32,34,402/- was disallowed as capital expenditure. Similarly, the assessee had paid a sum of Rs.3,09,28,775/- to MFI as license and technology fees @ 4% of net sales, 50% of which i.e. Rs.1,54,64,388/- was treated by the AO as capital expenditure, on which depreciation @ 12.5% amounting to Rs.19,33,048/- was allowed and balance amount of Rs.1,35,31,339/- was disallowed as capital expenditure. Similar treatment was given by the AO to license and technology fees paid by the assessee in the Assessment Years 2003-04 and 2004-05 and the amounts disallowed as capital expenditure in the two years were as under: 1. Assessment Year 2003-04 a) Rs.2,83,94,788/- on account of BMI b) Rs.92,63,108/- on account of MIL 2. Assessment Year 2004-05 a) Rs.1,25,37,895/- on account of BMI. b) Rs.2,06,64,682/- on account of MIL 5. The assessee disputed the decision of the AO and submitted before the CIT(A) that Clause 2.1 of the agreement clearly provided that the assessee had been granted only non transfer....
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....ing up of the plant suitable to manufacture of the products as well as technical information and knowhow relating to the manufacture of the product. The technical information and knowhow was to be used in connection with the business which was defined in the agreement as under:- "Business" (a) to design, construct, own, operate and maintain the facility (b) to design and manufacture the products at the facility (c) to distribute and sell the products pursuant to the terms of clause 7 of the shareholders agreement and (d) to acquire the property, raw materials, services and permits, licenses, approvals and other authorizations, to obtain the financing, and to hire the employees and agents necessary to permit the foregoing activities to be carried out. 5.2 Thus the technical information had also been used in relation to the design and construction of the plant. BMI was in particular responsible for designing the plant and the production facility incorporating techniques and equipments. The license and technical fees was, therefore, inextricably linked to the setting up of the business of the joint venture. The assessee was n....
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....ier. CIT(A) observed that DIPP had approved a single payment of royalty @ 4% of the sales and the AO had no basis to split the same into two parts i.e. 50% for use of trade mark and 50% for acquisition of technical information. CIT(A) held that the entire payment was in connection with the setting up of the new plant for manufacture of new product and, therefore, he held that the entire payment had to be considered as capital in nature. Accordingly, he enhanced the addition after allowing opportunity to the assessee who reiterated its earlier stand that the entire payment was revenue in nature. Aggrieved by the said decision, the assesse is in appeal before the Tribunal in all the three years. 6. Before us, the Ld. Senior Counsel appearing for the assessee reiterated the submissions made before the CIT(A) that license and technology fees was for the use of technical information for manufacture of the product and for sale of the products, which was very clear from the Clause 2.1 of the agreement. The fee was not for setting up of the plant. It was pointed out that the assessee had also paid a lumpsum fees of USD 7.5 lakhs, which could be considered as the payment for use o....
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....so related to the setting up of the facility and, therefore, the payment for technical information was also for the setting up of the plant. It was also argued that ultimately the joint venture agreement had been terminated and, upon termination, the assessee had perpetual right to use the information it had acquired from the parties and, therefore, the payment was for acquisition for capital asset of enduring nature. The Ld. DR further argued that the payment was also for technical assistance in relation to the setting up of the plant and, therefore, its nature was 'capital'. He referred to the letter dated 22.01.1996 of DIPP placed at page no.38 of the paper book to point out that there was a provision of conversion of lumpsum fees of USD 7.5 lakhs into equity, which was to be done in the same sequence and proportion in which the knowhow fees became due and, therefore, the payment for knowhow or the technical information was of the same nature as the lumpsum payment. He supported the finding of the CIT(A) that, in effect, the entire payment was in connection with the setting up of the plant and, therefore, the entire payment should be treated as capital in nature. 7.1 I....
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....3% to BMI on sales made through them. Since, both BMI and MIL had technical information and the trade mark for the manufacture and sale of fabrics, the assessee signed License and Technical Co-operation Agreement with BMI and MIL on 13.06.2006 separately but almost identically worded, making the provisions for use of trade mark as well as the technical information owned by the two joint venture partners, on payment of royalty @ 4% of net sales to each of them in respect of sales made through them and payment of sales commission @ 3% of net sales to each of them which had already been approved by the government. The expenditure on account of payment of commission @ 3% of the sales made through the joint venture partners has been allowed by the AO as revenue expenditure. The dispute is only about allowability of royalty @ 4% of net sales. The AO has allowed the royalty only @ 2% of net sales and the balance has been disallowed, treating the same as capital expenditure. CIT(A) on the other hand, has held that the entire royalty of 4% is relatable to the setting up of the plant and, therefore, held the same as capital in nature and disallowed. 8.1 It may be pertinent to point....
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....venture partners or on the sale of substantially all the assets and business of the company i.e. on sale of the company or on dissolution of the company. In case of termination of the agreement for any reason, the assessee company will loose the right to use the trade mark under the provisions of Clause 9.4(a) and in case of special events i.e. on sale of shares by either of the Joint Venture partners or on sale of the company, the Joint Venture partners shall grant perpetual license to the company to use the technical information. In the present case, since BMI had transferred all the shares to the Mafatlal Group on 31.03.2006, the AO observed that BMI was bound to grant the assessee company a perpetual license for use of technical information. Since, the assessee had the perpetual right to use the license, the AO concluded that the assessee had acquired a capital asset, the payment for which had to be treated as capital in nature. 8.3 In our view, the reasoning adopted by the AO for treating part of the royalty as capital expenditure, cannot be accepted. Firstly, it is not the case that the royalty payment was not approved by the government beyond the period of 7 years ....
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....s of Clause 9.4(a), in case of termination, under normal situation, it had no right to use the technical information and was required to return or destroy the same as per request of the joint venture partner and, therefore, payment for the same has to be considered as revenue expenditure. 9. CIT(A) has held that the entire payment of royalty @ 4% on net sales has to be treated as capital expenditure. His reasoning was that the technical information was to be used in relation to the setting up of the plant for manufacture of products as well as the technical knowhow relating the setting up of the plant itself. The joint venture was setting up a new business which consisted of designing and constructing the plant, designing and manufacture of products and distribution and sale of products. The BMI was particularly responsible for designing the plant and production facilities. Both BMI and MIL had not only provided the technical information and technical knowhow, but had also rendered valuable services in setting up of the plant itself and, therefore, the CIT(A) has held that the entire payment of royalty @ 4% on net sales was in relation to setting up of the plant and has t....
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....oted that in the application made to DIPP it was agreed that BMI would provide the technical information and know how relating to the setting up of the plant. There is also no material placed on record to show that MIL had provided technical information or knowhow in relation to setting up of the plant. The finding of CIT(A) that MIL had also provided technical information for the setting up of the plant is thus without any basis. Therefore, no part of royalty paid to MIL could be attributed towards the setting up of the plant. As for other services, such as providing technical information and trade mark in connection with the manufacture and sale of the product, BMI and MIL had been paid royalty separately under the provisions of the agreement. There is no finding by either of the authorities below that no technical information was required to be used in connection with the manufacture and sale of the products or that lumpsum payment of USD 7.5 lakhs paid to BMI was not adequate for the services rendered by BMI for setting up of the plant. Under these circumstances, treating the royalty payment @ 4% as expenditure towards setting up of the plant and treating the same as capital ex....
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....ly provided technical information for the manufacture of the product, but has also rendered valuable services for the setting up of the plant itself. It was under these circumstances that contribution of 25% of the royalty towards the setting up of the plant was upheld. In the present case, the royalty had been paid in connection with the manufacture of the product and sale of the product. For services rendered by BMI towards setting up of the plant, separate lumpsum payment had been made and, therefore, it would not be reasonable to attribute part of the royalty towards the setting up of the plant. 10.1 The judgment of Hon'ble High Court of Delhi in the case of CIT vs. G4S Security System (India) Pvt. Ltd (supra) relied upon by the Ld. DR is also of no help to the Revenue. In that case, the issue was regarding allowablitly of royalty payment for use of technical knowhow to the Denmark Company. It was found that all rights and know how continued to vest in the provider company and it was only right to use the knowhow that was made available to the assessee and that to based on its net sales. The assessee was not entitled to become the owner of the technical knowhow and the trade....
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.... Clause (iv) of the Explanation 1 of Section 115JB(2) and while computing the eligible profit for the purpose of section 80HHC, the assessee had not set off the brought forward loss and depreciation. The AO refered to the judgment of the Hon'ble Supreme Court in the case of CIT vs. Shirke Construction Equipment Ltd. (291 ITR 380), in which it was held that for computing the eligible profit for the purpose of section 80HHC brought forward business losses and unabsorbed depreciation had to be set off. The AO observed that after setting off the brought forward business losses and unabsorbed depreciation, there was no positive eligible profit of the business and, therefore, he did not allow any deduction on account of 80HHC while computing the book profit. In appeal, CIT(A) observed that the AO had rightly declined the deduction in conformity with the decision of Hon'ble High Court of Bombay in the case of Ajanta Pharma Ltd. (318 ITR 252). Aggrieved by the said decision the assessee is in appeal before the Tribunal. 13. Before us, the Ld. Senior Counsel arguned that the CIT(A) had confirmed the order of the AO following the judgment of Hon'ble High Court of Bombay in the case....