TaxTMI 
TaxTMI 
2015 (6) TMI 960
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....eved, the department is in appeal before us and has taken following grounds of appeal: - 1. "On the facts and circumstances of then case and in law, the ld. CIT(A) has erred in treating the payment of Rs. 43,75,000/- made on account of acquiring technical know how as revenue expenditure. 2. The appellant craves leave to add, alter or amend any ground of appeal raised before at the time of hearing." 5. Brief facts apropos this issue are that during the year under consideration, the assessee company had entered into technological collaboration agreement with Daikin Industries Ltd. as per which, Daikin had agreed to grant an exclusive and non-transferable right and license to use Daikin technology to manufacture, sell, install, maintain and service products during the terms of the agreement. In consideration of such rights and license granted by Daikin, the assessee company had agreed to pay USD 3 lakhs payable in three equal installments. Accordingly, during the year under consideration, the assessee company had paid Rs. 43,75,000/- as technical fees as first installment. The AO required the assessee to justify the claim of technical fees on revenue account. The assessee explain....
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.... does not pertain to provide assistance for setting up of the manufacturing facilities in any way. The agreement did not result in any acquisition of know how by the Appellant and only a license was granted to use the technical information supplied by Daikin during the currency of the agreement. * Daikin had only granted exclusive right to use or license to use the Daikin technology/technical information and had not transferred ownership of the technical know how for improvement of existing products of the appellant and manufacture of new (LICENSED) products by the appellant during the currency of the agreement. * Daikin continues to be the owner of such technology or technical information and all patent, trademark, trade name, copyright or design owned by Daikin shall revert upon expiration/termination of the agreement. * In case any copyrights, patents etc. pertaining to the same are infringed by any third party/unauthorized person, necessary remedial action would be taken at Daikin's cost. Therefore, the protection of intellectual property right in respect of such information and design is the responsibility of Daikin and not the appellant." 9. It was further contended th....
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....ring air conditioners and water coolers as a going concern from Seil Ltd., therefore, it could not be stated that the assessee was entering into a new line of business. iii) the "access" to technical knowledge and information was for running the business more profitably and efficiently and in respect, to its existing products. iv) the grant of license by Daikin was an exclusive and nontransferable right to use Daikin Technology in favour of the assessee and this right could not be transferred or sub licensed to any other third party. v) ld. CIT(A) relied on the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. J.K. Synthetics 309 ITR 371, wherein it was, inter-alia, held as under: - (v)expenditure incurred for grant of License which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: - (a) the tenure of the Licence; (b) the right, if any, in the licensee to create further rights in favour of third parti....
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....g this expenditure, the assessee company could manufacture and sell products and, therefore, the right to manufacture alleged under this agreement was connected and had nexus with receipt of technical information. Without right to manufacture and sell of products, technical information and know-how were of no use and hence the payments of "technical fees" was of capital in nature. 15. Ld. DR referred to page 41 of the paper book, and referred to article 11 of technological collaboration agreement dated 8th August, 2000, wherein mode of payment of technology transfer fee has been given. He submitted that this clearly shows that the benefit of this expenditure endured over considerable period. Ld. DR submitted that AO had allowed the royalty payment which was the revenue component but technology transfer fee was treated as capital because manufacturing per se could be carried out only by incurring this expenditure. Ld. DR submitted that this agreement was for 10 years and thus, the lump sum payment was for 10 years. Therefore, the assessee derived enduring benefit. 16. In the alternative ld. DR relied on the decision of Hon'ble Supreme Court in the case of Southern Switchgears Ltd.....
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....from Daikin. As per article 5 sub licensing of the agreement by licensee was permissible only with the prior written consent of Daikin. As per article 11.3 the period of agreement was for 10 years from the effective date or for 7 years from the commencement of commercial production of the license products by the licensee. Thus, it was not an agreement in perpetuity. Article 14.3 had put restriction on improvement of license products by licensee. This article reads as under: - 14.3 "Improvements in any items of LICENSED PRODUCTS which LICENSEE wishes to put into production shall be subject to a prior written approval of DAIKIN. Any improvements made by LICENSEE in respect of DAIKIN TECHNOLOGY as provided herein shall be licensed back/grant-back perpetually to DAIKIN by LICENSEE with the right of sub-licensing and without payment of any fees or costs by DAIKIN, any may be used by DAIKIN in its own production of DAIKIN products in Japan or elsewhere as it may, in its unfettered judgment, deem fit." 21. Article 17 contemplated for confidentiality and non-disclosure and article 17.1 read as under: - "17.1 LICENSEE shall keep strictly secret and confidential all DAIKIN TECHNOL....