TaxTMI 
TaxTMI 
2015 (2) TMI 368
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.... expense and not partly or wholly capital expense?" 2. The respondent-assessee Hero Motocorp Limited, earlier known as Hero Honda Motors Limited, was a joint venture between the Hero Group and Honda Motorcycle Company Limited, Japan (Honda, for short) for manufacture and sale of motorcycle using technology licenced by Honda. The respondent-assessee and Honda had entered into a technical collaboration contract dated 24th January, 1984, which was revised by second and third supplementary agreements. These agreements were valid for a period of ten years. The respondent-assessee and Honda thereupon entered into another agreement dated 2nd June, 1995 called „licence and technical assistance agreement' and we are concerned in the present appeals with the payments made under the said agreement and the question raised is whether royalty paid under the said agreement to Honda is wholly or partly capital expenditure. Another contention raised by the Revenue is that the model fee, which was separately payable under the agreement dated 2nd June, 1995 was capital expenditure. The third contention raised by the Revenue relates to payment of technical guidance fee and whether the same wa....
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.... form of right to use i.e. grant limited rights, while retaining ownership rights. In the latter case technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer of absolute or complete ownership. 6. The aforesaid aspect and its relevance in determining whether the expenditure was to acquire technical information and knowhow in capital or revenue field was elucidated by the Supreme Court in Commissioner of Income Tax, Bombay City I versus Ciba India Limited, (1968) 69 ITR 692 (SC). This judgment pronounced on 15th December, 1967 is incessantly cited and applied to decide this question/issue. In the said case, the assessee company had procured know-how in the form of processes, formulae, scientific data, working, prescription and other intellectual property rights developed by a Swiss Company, to produce licensed preparations and to promote their sale in India. Inspite of the fact that the Swiss Company had granted to the Indian assessee "full and sole right and licence" in the territory of India under the patents listed in Schedule-I, to ....
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....ears was considered to be not unduly long as to warrant an inference that some lasting advantage was obtained. Significantly, the division bench held that once conclusion was reached on the difference in principle between a payment made for acquisition of assets and a payment made for only use of intellectual property rights, the period of use pales into insignificance. Payment made for use of an asset for however long a period, it will be only payment of revenue nature. Similarly, whether payment was lumpsum or periodical cannot by itself in the absence of other facts, help decide whether the agreement was for acquisition of a capital asset or an enduring advantage. But the nature and character of the asset acquired, whether it is permanent or everlasting or merely enables an assessee to run its business more efficiently, is determinative. In the said case, technical knowledge was made available without absolute acquisition of any knowledge or asset and therefore payment, it was held, was revenue in nature. 9. In Triveni Engineering Works Ltd. vs. CIT (1982) 136 ITR 340 (Del), the Indian assessee was a public limited company manufacturing turbines and other machinery. It had ma....
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....g on or conduct of the business, and considered commercially, it would be an integral part of the profit making process. The court, therefore, held that the expenditure must be treated as revenue. Similar reasoning is to be found in the case of CIT vs. Bhai Sunder Dass & Sons P. Ltd. (1986) 158 ITR 195 (Del). Reference can also be made to the recent decision in CIT vs. Lumax Industries Ltd. (2008) 173 Taxman 390 (Del) wherein referring to a circular, it was observed that if a licence was acquired for use of technical knowhow for a limited period, the payment would not bring into existence an asset of enduring nature. In this decision, reference was made to the decision of the Supreme Court in Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 224 ITR 342, wherein it has been held that answer to the question whether a particular payment was wholly or partly capital or revenue expenditure, would depend upon several factors like, whether the assessee had obtained a completely new plant with completely new process and technology; whether the expenditure was for acquiring technical knowhow for betterment of the product which were already being produced; is it a case of improvisation and ....
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....rties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the "fruits of research" of the licensor, "once for all", (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which "access" to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge str....
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....e on the said aspect in view of the position of law as expounded above. However, we would like to refer to the decision in CIT vs. Southern Switchgear Ltd. (1984) 148 ITR 272 (Mad) relied on by the revenue. In the said case, the assessee had entered into a collaboration agreement for providing of technical knowhow for setting up of a factory and operation thereof. The foreign company had agreed not to manufacture products in India or give right to a third person to do the same. Referring to the clauses of the agreement, the High Court held that technical knowledge so secured had resulted in an enduring advantage and benefit, as the same was available even after termination of the agreement since the factory and its operation would have continued. The duration of the agreement was 5 years but the method, production, procedure, etc. would remain with the Indian assessee and, therefore, an enduring benefit/advantage was acquired. There was also conferment of exclusive right to manufacture and sell the articles, which was an independent right secured and was of an enduring nature. Accordingly, 25% of the royalty paid was disallowed as capital expenditure. Noticeably, it was observed th....
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....oped by Honda at the request of the respondent assessee with new development code and subject to new model agreement. Similarly, the term „model change' was defined as conduct through which a new model with new development code was made by a change in any part or entirety of the product, including but not limited to appearance, structure, characteristics or specifications and in each case was subject to a new model agreement. The agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated 24th January, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. 15. The other terms of the agreement were: (1) Rights and licenses granted by the licensor to the respondent assessee were exclusive, indivisible and non-transferrable, without the right to grant sub-l....
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....o third persons in any manner whatsoever, except as expressly provided. Respondent was to take all necessary precautions to keep the said information secret and confidential and restrict its use strictly as per the first as well as the present agreement. The respondent assessee was to establish and maintain internal regulations and procedures for protection of secrecy. The information could be disclosed to employees, Directors or approved sub-contractors when it was reasonably necessary for the purpose of manufacture, assembly, repair and servicing, subject to obtaining a „written promise' from the approved sub-contractors to treat all information as secret and confidential. (9) The aforesaid rights and obligations were to persist even on expiration or termination of the agreement. (10) The respondent assessee was not to use or cause or permit use by any third party, intellectual property right or technical information provided under the agreement. (11) The respondent assessee was not to claim any title or property right whatsoever during the existence of the agreement. Upon termination as a result ....
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....s in question were for right to use or rather for access to technical knowhow and information. The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and co....
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..... The Tribunal had held that the fee was revenue expenditure and, therefore, deductible under Section 37(1) of the Act in their decision reported as (2005) 95 TTJ Delhi 782, titled Hero Honda Motors Ltd versus Joint Commissioner of Income Tax, decided on 13th May, 2005. The Delhi High Court did not entertain and frame any question of law on the said aspect in the appeal of the Revenue on the said issue. Revenue had preferred a Special Leave Petition but the same was also dismissed. For the assessment years 1997-98 and 1999-2000, similar expenditure of model fee was allowed as revenue expenditure by the Tribunal. Appeals filed by the Revenue on the said issue were not entertained by the High Court. We would not like to decide the present appeal for this ground and reason, as the High Court orders do not set out and indicate any ground or reason. We do not comment or express an opinion on whether the High Court under Section 260A of the Act can at the time of hearing, frame any additional question of law. 20. We also reject the contention of the respondent/assessee with reference to the power of the Commissioner under Section 263 of the Act relating to assessment year 2001-02. In ....