TaxTMI 
TaxTMI 
2015 (4) TMI 1114
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.... use technical knowhow and patent rights for the purpose of its business. The CIT(A) erred in holding that the lump sum knowhow fees paid by the Appellant were in the nature of a capital asset and hence, entitled to deduction of Rs. 47,80,002 (being 1/6th of the amount paid during the year under consideration under Section 35AB of the Act. The CIT(A) ought to have held that a deduction of Rs. 8,82,46,665/- paid for supply of technical know-how be allowed under Section 37(1) of the Act, 1.2 The CIT(A) ought to have held that provisions of Section 40(a)(i) of the Act cannot be invoked in the Appellant's case as the appropriate taxes were deducted and paid under Chapter XVIIB of the Act. 1.3 Without prejudice to the above, the CIT(A) ought to have, in any case, held that even under Section 35 AB of the Act the Appellant is entitled to deduction of 1/6th of the entire amount paid and, therefore, ought not to have restricted the deduction to 1/6th of the amount paid during the year under consideration. 1.4 In view of the above, the Appellant prays as follows: Deduction of the entire amount of Rs. 8,82,46,665/- be allowed under Section 37(1) of the Act, without inv....
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.... by the Income-tax Department). The CIT(A) ought to have appreciated that in view of the Honourable ITAT's order in the Appellant's own case for Assessment Year 1996-97, only the net interest of Rs. 3,39,264 should have been disallowed. The Appellant prays that the above addition of Rs. 7,43,523 in respect of interest be deleted. 4. Depreciation on pollution control and energy savings device The CIT(A) erred in restricting the depreciation on certain pollution control and energy savings device to 50% instead of 100%. The CIT(A) ought to have held that depreciation at the rate of 100% should be allowed on these assets. The Appellant prays that 100% of the depreciation be granted on the above assets. 5. Deduction under Section 80M of the Act The CIT(A) erred in rejecting the Appellant's claim that dividend of Rs. 12,96,000/- received on Master shares of Unit Trust of India (UTI) should be considered for purposes of computing deduction under Section 80M of the Act, The Appellant prays that deduction of Rs. 12,96,000/- be allowed under Section 80M of the Act in respect of dividend received on Master shares of UTI. 6. The Appellant prays that the AO b....
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....nt of 1/6th of same should be allowed. The assessee made elaborate submissions before the CIT(A), which are referred to in para 3.2 at pages 5 to 8 of the appellate order. The plea of the assessee was that the agreement was entered into for access to use the technical know-how and patent rights of Sandvik for the purpose of manufacturing, marketing and selling certain cemented carbide products. The said agreement granted the assessee only right to use technical know-how and as per the agreement, the consideration for the technical know-how and technical assistance was payable in three installments i.e. first installment of 1/3rd on receipt of government's approval, next installment of 1/3rd on delivery of know-how and the balance installment of 1/3rd on commencement of production under the said know-how, but not later than four years from the date of receipt of know-how. Further, royalty of 5% on domestic sales and 8% of the export sales was to be paid for a period of seven years as defined in the agreement. On obtaining the RBI's approval, the first installment of US$ 666667 being 1/3rd of the total consideration payable, was paid in the financial year 1996-97. The assessee claime....
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....f the agreement, the assessee had the right to continue without any time limit to use the know-how made available under the agreement. The said know-how after expiry of 7 years and the termination of the agreement could be used by the assessee in all the countries, free of charge and also to use in India, the same free of charge. The CIT(A) in view thereof, observed that the benefits arising to the assessee were of enduring nature and such know-how were in the nature of capital asset, which were to remain in possession of the assessee even after expiry of 7 years. The CIT(A) further observed that With the said agreement there had come into existence asset and advantage of enduring nature. It was not a case of obtaining and updating mere use of technical knowhow and information which was available with the appellant. Though the appellant deals with cutting tools the knowhow was for a new type of cemented carbide products. Therefore, I am of the considered view that the lump consideration for acquiring know how for the use for the purpose of business was covered by provisions of section 35AB and the appellant was entitled for deduction of 1/6th of the amount so paid. The CIT(A) furth....
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....a of the learned Authorized Representative for the assessee in this regard was that no appeal has been filed by the Revenue against the said observations of the CIT(A). Our attention was then drawn to the provisions of section 40(a)(i) of the Act and the proviso thereunder. It was contended by the learned Authorized Representative for the assessee that the proviso only applies if main section applies. It was further submitted by the learned Authorized Representative for the assessee that no amounts were debited to Profit & Loss Account, but only liability was shown in the balance sheet and further explanation of the learned Authorized Representative for the assessee was that the year ending for the company was 31.12.1996 and only for income tax purpose, the balance sheet was drawn as on 31.03.1997. Our attention was drawn to the page 3 of the Paper Book - II, where the list of expenses were provided and page 9 of the Paper Book - II, under which the advances recoverable in cash were shown at Rs. 16.14 crores. This was in respect of balance sheet as on 31.03.1997. Further, our attention was drawn to the page 36 of the Paper Book - II, wherein the amortized amount on technical kno....
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....r a period of 7 years, but for ever and where there was definite passage of technology, then such benefit arising to the assessee was of enduring in nature since there was no time limit fixed for the use of technology. Hence, the expenditure claimed by the assessee was capital expenditure and the provisions of section 35AB of the Act were to be applied. Our attention was drawn to the Preamble of the agreement entered into between the parties and it was pointed out that the assessee was supplying back to the parent company, the tools manufactured by it and assessee also showed its willingness to sell the products both in the domestic market and also outside India. As per clause 2.4 of agreement, in addition to know-how, everything else was passed to the assessee as independent manufacturer. Further, reference was made to the termination clause and its effect in clause 8 of the agreement. The claim of learned Departmental Representative for the Revenue was that there was actual acquisition of know-how and not only the rights to use the knowhow. Reliance was placed on the following ratios laid down by various courts: 1. APS-Star Industries Ltd. Vs. DCIT (2003) 86 ITD 182 (....
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.... year of claim itself, then short deduction of tax at source would not attract the provisions of section 40(a)(i) of the Act, in view of the ratio laid down by Pune Bench of the Tribunal in assessee's own case relating to assessment year 1994-95. 13. We have heard the rival contentions and perused the record. The assessee during the year under consideration had entered into an agreement with AB Sandvik Coromant, Sweden (hereinafter referred to as 'Sandvik') and M/s. Sandvik Asia Ltd. The agreement dated 18.01.1997 is placed at pages 1 to 27 of the Paper Book - I. As per Preamble to the agreement, it was acknowledged that Sandvik was the leading company in the world in cemented carbide and high speed steel cutting tools and also cutting tools system for metal working. M/s. Sandvik was in possession of extensive know-how regarding the manufacture, marketing and sale of such products as well as of patent and trade marks relating thereto. On the other hand, the assessee was supplying different types of products to Sandvik for sale through its international sales organization. It is further provided in the said Preamble Whereas, SAL, has expressed an interest in obtaining long ter....
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.... prices and other terms and conditions to be agreed upon. Further, under clause 2.8 of the agreement, the said assistance and services provided by the Sandvik does not shoulder any responsibility upon Sandvik for the way and the manner in which Sandvik know-how and advice are applied by the assessee. Clause 3 of the agreement talks about license. Clause 3.1 of the agreement reads as under:- "3.1 SAL is hereby granted the right and license to use the Sandvik Patent Rights and the Sandvik know-how for the manufacture in India of the productions, and for the marketing and sale of the products in India and elsewhere through the Sandvik Sales organization provided, however, that Sandvik shall have the final ruling as to the sale of products manufactured by SAL in Europe and North America. This license does not include the right to assign it or grant sublicenses under it." 16. As per clause 3.1 of the agreement, the assessee was granted the right and license to use the Sandvik Patent Rights and the Sandvik know-how for the manufacture in India. However, the license did not include the right to assign it and grants sublicenses under it. However, Sandvik had final say as to the sale ....
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.... right, subject to the compliance with the obligations in respect thereof imposed by this Agreement, to continue without any limit of time and without any charge using any unpatented Sandvik know-how made available to SAL pursuant to this Agreement. 8.2 At the termination of the Agreement pursuant to Article 7.2 SAL shall further have the right to continue to use the Sandvik know-how and the inventions being the object of the Sandvik Patent Rights provided, however, that royalty, notwithstanding the termination of the Agreement shall always, save as stated in the last paragraph, be payable as stated herein with regard to all Products manufactured during a period of seven years from the commencement of commercial production of the Products. After the expiration of said period SAL shall have the right to use the Sandvik know-how in all countries free of charge and to use in India also free of charge any invention under the Sandvik Patent Rights (Indian), As to the sale by SAL outside India or for use outside India of any Product incorporating an invention under Sandvik Patent Rights such sale is subject to continuous - as long as the relevant Sandvik Patent Rights are valid - p....
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....expenditure to be allowable under the provisions of section 35AB of the Act. 19. The provisions of said section 35AB read as under:- "35AB. (1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year 44[relevant to the assessment year commencing on or before the 1st day of April, 1998] any lump sum consideration for acquiring45 any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. (2) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years. 46[(3) Where there is a transfer of an undertaking under a scheme o....
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....uring benefit. In the facts of the case before the Hon'ble Supreme Court, the assessee had acquired new technology for the manufacture of a product and payment was made for technical know-how, which was for the betterment of the product in question, which was already produced and where even on the expiry of agreement, the assessee deemed to derive benefits and manufacture the product in the factory. The issue was whether the entire payment made could be held as revenue expenditure, the Hon'ble High court had disallowed 25% of the sum paid as royalty as capital expenditure not allowable as revenue expenditure, which was upheld by the Hon'ble Supreme Court. 22. Further, the learned Authorized Representative for the assessee relied on the ratio laid down by Hon'ble Madras High Court in CIT Vs. Simpson and Co. Ltd. (1999) 239 ITR 83 (Mad) for the proposition that the acquisition of technical know-how relating to manufacture of automobile engines, was not of enduring benefit and amount paid for acquiring such technical know-how was revenue expenditure. Similar proposition had been laid down by the Hon'ble Supreme Court in CIT Vs. I.A.E.C. (Pumps) Ltd. (1998) 232 ITR 316 (SC) on which....
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....to an agreement on payment of consideration, then the provisions of section 35AB of the Act gets attracted and it was further held that the said provisions are also attracted even in those cases where right is not acquired absolutely, but for limited period. Further reliance was placed on the ratio laid down by the Ahmedabad Bench of the Tribunal in APS-Star Industries Ltd. Vs. DCIT (2003) 86 ITD 182 (Ahd), wherein the provisions of section 35AB of the Act were applied to lump sum payment for acquiring technical know-how by observing that even if both the provisions i.e. section 35AB and 37(1) of the Act are applicable in respect of any expenditure, section 35AB would apply and such expenditure would be outside the purview of section 37(1) of the Act. It was thus, held that where the assessee had acquired a benefit of enduring nature and the expenditure in connection thereof being capital in nature, was not deductible under section 37(1) of the Act. The learned Departmental Representative for the Revenue further pointed out that the ratio laid down by the Hon'ble Supreme Court in Alembic Chemical Works Co Ltd Vs CIT (supra) related to pre-introduction of section 35AB of the A....
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....were delivered prior to introduction of section 35AB of the Act, which was inserted by the Finance Act, 1985, w.e.f. 01.04.1986. 27. In the facts of case before the Hon'ble Supreme Court in Drilcos (India) (P.) Ltd. Vs. CIT (supra), the assessee had acquired technical know-how under an agreement for consideration, which was to be paid in installments. The question for determination was whether the expenditure could be claimed as deduction under section 37 of the Act. The Hon'ble Apex court held as under:- "5. The contention of the assessee is that Section 35AB of the Act is not applicable to this case. We find no merit in the said contention. Subsection (1) of Section 35AB of the Act clearly states that where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, then one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. Explanation to the said section says that the word 'know-how' means any indus....
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....e the assessee has paid consideration for acquiring technical know-how, as in facts of present case, which is to be used for carrying on its business, then such expenditure falls in the realm of section 35AB of the Act, irrespective of the fact whether the expenditure is in capital or revenue field. In view thereof, we find no merit in reliances placed upon by the learned Authorized Representative for the assessee on series of decisions to draw difference between revenue and capital expenditure. 30. Another aspect of the issue is whether such expenditure is allowable under section 37 of the Act. The Ahmedabad Bench of the Tribunal in APS-Star Industries Ltd. Vs. DCIT (supra) on the said issue held as under:- "19. Regarding the applicability of section 37(1) we have held above that the lump sum consideration paid by the assesses would fall within the purview of section 35AB and therefore would be excluded from the ambit of section 37(1). Without prejudice to the aforesaid conclusion reached by us in the preceding paragraphs, we may point out that the expenditure in question is clearly of the nature of capital expenditure and on this ground also it would not be deductibl....
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....he company would clearly be of capital nature and therefore outside the purview of section 37(1). It has been held by the Hon'ble Supreme Court in Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1 and Alembic Chemical Works Co. Ltd v. CIT [1989] 177 ITR 377 that if the expenses incurred by the assessee are in the capital field and are inextricably connected with the capital structure of the company. Such expenses would be held lo be capital in nature. Applying the principles enunciated by the Hon'ble Supreme Court in the aforesaid judicial pronouncements, the conclusion is irresistible that the expenses under question are dearly of capital nature and are therefore, outside the purview of section 37(1). The various documents such as drawings, designs, charts, plans included in the technical documentation provided by the foreign collaborator obviously form the tools by using which the business of manufacturing the textile machinery spare parts was to be done by the assessee and for acquiring such technical knowhow through these documents, a lump sum payment was made. This expenditure was incurred by the assessee as and by way of purchase price of such documentation and was of a cap....
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....see by paying the consideration against the purchase of the said technical know-how and we find no merit in the plea of the assessee that the consideration to be paid in installments was paid for the use of technical know-how and not for the acquisition of technical know-how and hence not covered under section 35AB of the Act. The section itself provides that any lump sum consideration paid for acquiring any know-how, for use, for the purpose of his business is to be deducted in six installments. Under the agreement, the technical know-how received by the assessee was in relation to production of new type of cemented carbide products, and acquisition gave rise to coming into existence of asset and advantage of enduring benefit and the same is envisaged in section 35AB of the Act. There is passage of rights, knowhow and technology under the agreement, and the said asset and advantage had been acquired for use in business of the assessee and the same could be used by assessee even after the term of agreement. We hold that the assessee having acquired the technical know-how is to be subjected to the provisions of section 35AB of the Act vis-à-vis its claim of deduction of the s....
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....sed in this year or not. Ostensibly, if the aforesaid factual matrix noted by the Commissioner of Income-tax (Appeals) and which was required to be verified is justified, the claim would be allowable as such. We also find that the Assessing Officer in his order dated 10.3.1998 has not carried out the directions of the Commissioner of Income-tax (Appeals) in its proper perspective, but has merely gone by the fact that the claim has been made under "provision for doubtful debts". In our considered opinion, it would meet the ends of justice if the matter is restored to the file of the Assessing Officer with directions to consider the true nature of the claim in the light of the observations of the Commissioner of Income-tax (Appeals) in para 6.3 of his order dated 28.11.1997 and not be guided by merely the nomenclature of the head under which the claim has been made. Needless to say, in carrying out the aforesaid exercise, the Assessing Officer shall provide reasonable opportunity of being heard to the assessee. Thus, on this issue assessee succeeds for statistical purposes. 19. In the result, appeal of the assessee is partly allowed. 20. The appeal by the Revenue vide ITA No 11....
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....lar issue arose in assessee's own case for the assessment year 1992-93 in ITA No 119/PN/96 (supra) wherein the issue has been decided against the assessee and in favour of the Revenue, by way of a majority decision vide order dated 13.9.2011 (supra). It has been held that the assessee is assessable in respect of the gross interest received from the Income-tax Department and not merely on the net interest remaining after set off of interest paid to the Department. The interest payment has also not been held to be deductible from interest received in order to arrive at the assessable income. In this view of the matter, the impugned order of the Commissioner of Income-tax (Appeals) on this issue is set aside and that of the Assessing Officer is restored. Thus, on this Ground Revenue succeeds. 26. In the result, appeal of the Revenue is partly allowed." 34. In view thereof, we allow the alternate plea raised by the assessee that the provisions of section 35AB of the Act are to be applied on the total liability of Rs. 8.82 crores and 1/6th on said amount is to be allowed as deduction in the hands of the assessee. The ground of appeal No.1 raised by the assessee is thus, partly....
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....of services were of similar nature. We find no merit in the plea of assessee as the training course fees in no way can be attributed to export business and hence cannot form part of profits of business, which are eligible for deduction under section 80HHC of the Act. Confirming the order of CIT(A), we dismiss the ground of appeal No.2.2 raised by the assessee. 40. The issue vide ground of appeal No.3 raised by the assessee is in relation to inclusion of interest income received from the Income-tax Department in the hands of the assessee. 41. The case of the assessee was that it had received interest income of Rs. 7,43,523/- and had paid interest of Rs. 10,82,787/- from the Income-tax Department. However, in the computation of income, the assessee had added back sum of Rs. 3,39,264/- on account of interest paid to the Department. The Assessing Officer and the CIT(A) however, held that the interest paid under section 234A, 234B and 234C of the Act were not deductible as per provisions of section 40(a)(ii) of the Act. 42. The learned Authorized Representative for the assessee before us fairly pointed out that the issue is to be decided against the assessee. In view thereof, w....