TaxTMI 
TaxTMI 
2014 (7) TMI 92
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the respondent- assessee. 3. The assessee-Company claimed technical know-how fees of Rs.24,04,000/- in the Profit & Loss Account. The Assessing Officer, after detailed consideration of such expenditure, held this to be revenue in nature. It also held that the assessee' s request for applying Section-37 is also incorrect. The expenses of technical know-how is covered by the provision of Section-35AB of the Act and there would not arise question of applicability of provision of Section-37 of the Act and accordingly, such technical know-how is added to the total income of assessee. 4. The same was challenged before the Commissioner of Income Tax (Appeals). The CIT(A) confirmed the view of the Assessing Officer by holding thus: - "13... I have carefully considered the facts of the case and submission of the learned counsel of the appellant. I am inclined to agree with the contention of the Assessing Officer that the word 'know-how' has been given a very wide meaning by Explanation to Section-35AB. As per explanation 'know-how' means any industrial information or technique likely to assist in the manufacture of proceeding of goods o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such technical know-how from the foreign company. The assessee was merely a licensee under which license it could use a know-how for the purpose of its business temporarily. For such acquisition of know-how, the assessee paid lump sum payment. It had also come on record before the Tribunal that such technical know-how was used for the purpose of manufacturing the existing items which the assessee was manufacturing since years. In short, without saying so many words, the Tribunal also confirmed the view of the revenue authorities that the expenditure was revenue in nature. If that be so, the question arises whether deduction of such expenditure can be limited by applying section 35AB of the Act. 19. As already noted, as clarified by the CBDT circular dated 12.6.1985, such provision was made in the statute in Finance Act, 1995 (with effect from 1.4.1985) with a view to providing further encouragement for indigenous scientific research. Section 35AB of the Act, which was later on deleted with effect from 31.3.1999, reads as under : "S. 35AB. Expenditure on know-how. (1) Subject to the provisions of sub-section (2) , where the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acturing of diesel engines. The Assessing Officer was of the opinion that such expenditure was covered under section 35AB of the Act and the same could not be treated as a revenue expenditure. After considering the assessee's reply, the Assessing Officer applied section 35AB of the Act to such expenditure. The assessee approached the Commissioner (Appeals) against such a decision contending that under the said agreement, the assessee had not become the owner of the technical know-how and no benefit of enduring nature had been received by the assessee. The CIT (Appeals) granted benefit to the assessee to the extent such expenditure represented the royalty calculated on the basis of the sales including excise duty and sales tax. The CIT (Appeals) held that such expenditure was revenue in nature and accordingly, allowed the assessee's appeal. The Department, thereupon, approached the Tribunal. The Tribunal rejected the revenue's appeal. The Tribunal referred to various clauses of the agreement between the assessee and the know-how provider to hold that such expenditure was revenue in nature. When the matter reached the High Court at the hands of the revenue, the High Court....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding on this aspect though the Tribunal had confirmed the view of the CIT (Appeals) that the expenditure was revenue in nature. It was precisely for this reason that the Apex Court remanded the proceedings for authoritatively declaration on this point by the High Court. 22. In addition to the decision of the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra), we also would like to place reliance on the clarificatory circular issued by the C.B.D.T. bringing out the nature of the benefit being provided under section 35AB and the purpose for introduction of such provision in the statute. Such provision, as was clarified, was made with a view to providing further encouragement for indigenous scientific research. Thus, such statutory provision was made for making available the benefits which were hitherto not available to the manufacturers while incurring expenditure for acquisition of technical know-how. To the extent such expenditure was covered under section 35AB of the Act, amortized deduction spread over six years was made available. If such expenditure was capital in nature, prior to introduction of section 35AB of the A....