TaxTMI 
TaxTMI 
2014 (8) TMI 459
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....he case, the Tribunal was right in holding that the 5% of the sale proceeds of the product paid by the assessee to the foreign company pursuant to the collaboration agreement dated 8.12.1993 is in the nature of royalty and not fee for technical know how? (iii) Whether in the facts and circumstances of the case, the provisions of Section 35AB read with Explanation 2 to Section 9 vii can be invoked? (iv)Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amounts paid by the assessee to the foreign company pursuant to the collaboration agreement dated 8.12.1993 is allowable as revenue expenditure and not to be treated as capital expenditure? (v)Whether in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax collection should be excluded from the total turnover for the purpose of calculation of deduction under Section 80HHC? And (vi)Whether in the facts and circumstances of the case, the Tribunal was right in holding that the income from wind mill should be excluded from the turnover for computation of deduction under Section 80HHC? 2.1. At the outset, we notice that substantial questio....
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....ts dated 24.5.1989 and 8.12.1993 do not provide for any lumpsum payment, whether the payment of royalty by the assessee should be treated as cost of technical know-how, which would fall under Section 35AB of the Income Tax Act? 5.1. To decide the above issue, let us briefly traverse the relevant facts of the present case. The respondent/assessee is engaged in the manufacture of automobile parts and components. They entered into Technical Collaboration Agreement dated 7/24.10.1986 with a Japanese company, namely, Arai Seisakusho Co. Ltd. As per the said agreement, the assessee was granted exclusive license to manufacture and sell the entire range of reed valves. The said agreement was valid for a period of ten years. Article 7(1) of the said agreement stipulates the manner in which payment should be made by the assessee to the Japanese company and for better clarity, the Article 7(1) is extracted hereunder: Article 7. Technical License Fee: 1. In consideration of the right and license granted under this Agreement, a. HI-TECH shall pay to ARAI the lumpsum of U.S. Two Hundred Ten Thousand Dollars (US $ 210,000) in three standard installments, the first installment U.S. Seventy Tho....
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.... of imported components manufactured by HI-TECH. This royalty payment will be subject to Indian Taxes. The payment made in terms of the above Article was claimed by the assessee as revenue expenditure in terms of Section 37 of the Act and accepted by the Department. 5.4. Thereafter, on 8.12.1993, another Technical Collaboration Agreement was entered into between the very same parties for grant of license to manufacture and sell the entire range O' Rings, Oil Seals, Moulded Rubber Parts, Reed Valve Assemblies and for this, payment terms are set out under Article 7(1) of the said agreement, which reads as under: Article 7. Technical License Fee: 1. In consideration of the right and license granted under this Agreement, HI-TECH shall further pay to ARAI the running royalty of five per cent (5%) for a period of five (5) years from the commencement of production effective date of this agreement calculated on the ex-factory price of products, net of excise duties minus the cost of standard bought-out components and landed cost of imported components manufactured by HI-TECH. This royalty payment will be subject to Indian Taxes. The payment made in terms of the above article was ....
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....me was disallowed. Aggrieved by these assessment orders, the assessee went on appeal and the Commissioner of Income Tax (Appeals) allowed the appeals in favour of the assessee. Challenging the said order, the Revenue went on appeal to the Tribunal. 5.9. The Tribunal accepted the plea that payment towards royalty is revenue expenditure and not capital expenditure in terms of Section 35AB of the Act. 5.10. Aggrieved by the said order, the Revenue is before us raising the substantial questions of law, referred supra. 6. We have heard Mr.M.Swaminathan, learned Senior Standing Counsel appearing for the Revenue and Mrs.Pushya Sitaraman, learned Senior Counsel appearing for the respondent and perused the decision of the Tribunal and the authorities below. 7. In this case, the Tribunal interpreted the agreements dated 24.5.1989 and 8.12.1993, as agreements for grant of license to an existing company for manufacture and sale of automobile parts and components and it is not technical know-how for setting up a new plant and for manufacturing a completely new product with the aid and assistance of the foreign company. The Tribunal, based on records, was of the firm view that the assessee i....
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....ns of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made.' It is not clear from the facts found by the Appellate Tribunal that the assessee obtained technical knowledge for the setting up of a new plant and for manufacture of a completely new product with the aid and assistance of technology of the foreign company. Furthermore, as we have already seen, the assessee had an existing business and from the mere fact that certain new products are sought to be manufactured it cannot be stated that it had set up a new plant with a new technology and the cumulative effect of the various terms of the agreement clearly show that the expenditure cannot be regarded for acquiring a capital asset by the assessee. Though the assessee had a right to use the technical know-how even after the completion of the agreement, that fact itself would not be conclusive to hold that the payment was of capital nature. The question whether the payment can be regarded as revenue or capital in nature depends upon the object of the expenditure and the effect of the expenditure and the impact of the expenditure in the business carried on by the assessee a....
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....ted in Alembic Chemical Works case [1989] 177 ITR 377 no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined. But in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the Revenue and again....