TaxTMI 
TaxTMI 
2017 (1) TMI 729
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 34 of 2010 2002-2003 1673/Del/2009 03/07/09 5 28 of 2010 2001-2002 889/Del/2009 29/06/09 2. Income Tax Appeal (hereinafter referred to as ' ITA') No. 503 of 2008 was admitted on the following substantial questions of law: "(1) Whether on the facts and circumstances of case the ITAT was legally justified in holding that fee for technical service of 29,40,64, 000/- and royalty payment of 18,55,24,000/- as revenue expenditure inspite of the fact that they were of enduring nature. (2) Whether on the facts and circumstances of case, ITAT has erred in law by ignoring the fact that limited right to use know how that yields enduring benefits cannot be termed as revenue expenditure. (3) Whether on the facts and circumstances of case, the ITAT was right in holding non existence of ownership rights for manufacturing activities, making payments of technical know how, and revenue paid for manufacturing activities can be termed as revenue in nature." 3. In all the remaining matters, Tribunal has followed its earlier decision dated 16.5.2008 and therefore, all the subsequent appeals were connected with leading ITA No.503 of 2008, h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sesses certain intellectual property rights, manufacturing information and know-how, quality standards and marketing methods relating to such products. HSCIL/Assessee/lecensee was desirous of obtaining and receiving a 'licence' and 'technical assistance' from licensor for manufacture and sale of certain automobiles. HMCL, Japan was willing to give such licence and assistance. 12. Agreement itself defines certain terms, namely, 'Products', 'Parts', "Manufacturing Facilities","Intellectual Property Rights", "Know-How" and "Technical Information" in Articles 1, 2, 3, 5, 6 and 7 of the agreement, which read as under: "1. The term "Products" shall mean the automobiles, the specific models and types of which are listed in Exhibit I attached hereto; 2. The terms "Parts" shall mean the component parts of the Products and shall include the parts for repair or rep0lacement of the Products. The LICENSOR may in consultation with licnesee, taking into consideration the Intellects. Property Rights, the Know-How and the Technical Information classify the parts as (a) the parts which are supplied by LICENSOR or its designees to licnesee hereunde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Industrial Standard (JIS), Whether in writing or not, which directly relates to the Products or the licenced Parts or is necessary for the manufacture of the Products or the licenced Parts and which LICENSOR owns at the time of execution of this Agreement or may own from time to time during the term of this Agreement or under which LICENSOR is entitled to grant a licence to licnesee, and the Technical Information shall include the "Technical Materials" designated by LICENSOR as "Technical Materials" (emphasis added) 13. Licence was granted by HMCL, Japan to an indivisible, non-transferable and exclusive right and licence to manufacture, use and sell the products and the licensed parts within the territory under the intellectual property rights by using know-how, and technical information. It also provided that licnesee i.e HSCIL/Assessee may grant sub-licences with a prior written consent of licensor. It also provided that to sale or export any products and parts, to any place outside territory of India, prior consent of licensor would be required. 14. In view of aforesaid licence, a consideration/lump sum fee agreed between parties was 30.5 million U.S Dollar, payable in fiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e made, then conversion shall be made in accordance with the the final quotation of the telegraphic transfer selling rate of exchange prevailing at the time of remittance by the Delhi office of any international bank, mutually agreed separately. 14.3 All payments and remittances by licensee will be subject to Tax Deduction at Source (TDS)/ levy of CESS (under Research and Development Cess Act, 1986). Receipt by LICENSOR of any payment tendered hereunder shall not constitute LICENSOR'S acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by licensee to LICENSOR hereunder shall not be refundable to licensee, in any facts or circumstances whatsoever. If licensee fails to make any payment here under on the due date, licensee agrees to pay a late payment fee in the amount equivalent to LIBOR +TWO (X) percent per annum in the payment currency, calculated on the basis of a 365 day year, subject to Government of India / RBI approvals / guidelines prevailing at that time. 14.4 It is understood and confirmed that it should be separately agreed to by the parties hereof in the "Memorandum on Exchange of Technicians"....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Parts, and (ii) the use of the Intellectual Property Rights, Technical Information licensed or furnished by LICENSOR under this Agreement. 2. licensee shall promptly return to LICENSOR all particular documents and tangible property supplied by LICENSOR in connection with this Agreement and belonging to LICENSOR and shall keep all Information received by licensee hereunder secret and confidential in accordance with Article 7 hereof; 3. licensee shall not be entitled to demand from LICENSOR, for the reason of the expiration or termination of this Agreement or the failure to renew or extend it, any damages, reimbursements or other payments on account of the current or prospective profits on licensee's sale or anticipated sale of the Products and the Parts, or on account of the establishment, development or maintenance of the goodwill or other business of licensee, or on account of any other cause of thing whatsoever, except as provided in this Agreement; 4. Even after the expiration or termination of this Agreement for any reason whatsoever, the licensee permits LICENSOR or its agents to have access to licensee's factories and other facilities an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndum which were also executed and the same are as under: a. Memorandum on exchange of technician. b. Memorandum on supply of parts. c. Memorandum on supply of manufacturing facilities. 19. Assessee filed a return on 29.12.1999, declaring a net loss of Rs. 14,59,91,000/- in the office of Joint Commissioner of Income Tax, Special Range 26, New Delhi for Assessment Year (hereinafter referred to as "AY") 1999-2000. Later on revised return was filed declaring loss of Rs. 14,61,10,910/- on 30.3.2001. Subsequently, jurisdiction was transferred to Assistant Commissioner, Income Tax, Circle Noida (hereinafter referred to as "ACIT)". Assessment was completed on 21.03.2002 under section 143(3) of Income Tax Act 1961 (hereinafter referred to as "Act 1961") at a net loss of Rs. 8,48,61,712/-, after making addition of Rs. 3,03,01,605/-. 20. Assessee thereafter preferred appeal before Commissioner of Income Tax (Appeals), Ghaziabad (hereinafter referred to as "CIT(A)"), who partly allowed appeal, granting reliefs of Rs. 1,19,908/-. Subsequently, for re-assessment, a notice dated 20.5.2005 was issued under section 148 for the reason that Assessee made payment of ro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0/-, respectively. 24. The last case up for consideration relates to AY 2005-2006 wherein, Assessee filed return of income on 31.10.2005, showing income of Rs. 2,45,12,65,555/-. Since foreign exchange transaction under Section 92 of Act 1961 exceeded Rs. 5 Crores, this case came under compulsory scrutiny. Hence notice under section 143(2) of Act 1961 was issued on 22.4.2006. ACIT in assessment order dated 29.12.2008 made additions, besides others, of the payments towards 'Technical know how' and 'Royalty', treating the same as 'Capital Expenditure' and not 'Revenue Expenditure'. The amounts paid towards 'Technical know-how' and 'Royalty' were Rs. 26,62,04,000/- and Rs. 44,27,31,000/-, respectively. 25. In all the aforesaid matters, appeals preferred by assessee were disallowed by CIT(A), holding that payments made towards Technical know-how' and 'Royalty' cannot be treated Revenue expenditure. Said decision of Commissioner has been reversed by Tribunal in judgments and orders impugned in these appeals. Therefore, the sole question up for consideration in all these appeals, as noticed above, relates to the nature of p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital expenditure, by construing certain clauses/articles of Technical Collaboration Agreement dated 21.5.1996. According to it, acquisition of 'Technical know-how' and licence are crucial for setting up business of Assessee. It is not something which has been obtained subsequently in an already running business but 'Technical know-how' and licence was foundation of the business in question and for setting up of industrial establishment of Assessee. Shri Goel urged that apparently, agreement was signed in 1996 and at that time, Assessee was not already manufacturing any product so that it could be said that aforesaid payments were made to augment business prospects or to run more efficiently but 'Technical know-how' and licence etc. are the basic foundation for establishment, commencement and running of business. 'Technical know-how' and licence constitute basic input for setting up manufacturing plant. Agreement envisages payment of 'Technical know-how' in third year, after commencement of production. It also indicates that it covers a time which Assessee would take for its establishment and to run business, so as to make payment smoothly. Ev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ose of effective and better running of business. It will make no difference whether payments were made for running business or for the business which is yet to commence but payments would qualify to be a 'Business Expenditure' and not as a 'Capital Expenditure' since the same does not add to the Assessee, and capital of Assessee's business. It is also pointed out that there are separate agreements with licensor i.e. HMCL, Japan, with respect to supply of manufacturing facilities as well as for obtaining services of technical experts for installation of those facilities. 'Technical know-how' supplied by HMCL, Japan was nothing to do with business or manufacturing by Assessee. It has nothing to do with business plants and machinery, which were capitalized under the relevant Assets heads and depreciation was provided therefor. No such depreciation is permissible in respect of 'Technical know-how' fee and 'Royalty'. Hence, it was rightly claimed as 'Revenue Expenditure'. 31. In view of above submissions advanced on both the sides, we have to now examine and adjudicate whether nature of payments made towards fee for 'Technical k....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court held that 'Royalty' payment made by Assessee were revenue expenditure and, for this purpose, it held that secret processes were not sold by Swiss company to Assessee. Further, the reasons that prevailed with the Court to hold 'Royalty' payment as 'Revenue Expenditure', are: (a) licence was for a period of five years, liable to be terminated in certain eventualities even before expiry of the period; (b) object of the agreement was to obtain the benefit of technical assistance for running the business; (c) licence was granted to Assessee subject to rights actually granted or which may be granted after the date of agreement to other persons; (d) Assessee was expressly prohibited from divulging confidential information to third parties without consent of Swiss company; (e) there was no transfer of fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to Assessee and (f) stipulated payment was recurrent dependent upon the sales, and only for the period of agreement. Court stressed upon the fact that Assessee acquired under the agreement merely right to access to technical knowledge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pheld the view of Courts below that it was as a good citizen and not connected with the business of Assessee, hence disallowable under section 10(2)(xv). With respect to another item, which Assessee paid under Sugarcane Development Scheme, Court followed the test laid down in British Insulated and Helsby Cables Ltd. Vs. Atherton 10 TC 155 where learned Law Lord Cave L.C. stated "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital" and said that this test is a well known test for distinguishing capital and revenue expenditure but not of universal application. It must yield where there are special circumstances leading to a contrary conclusion. For this opinion, Court referred to Lord Radcliffe in Commissioner of Taxes Vs. Nohanga Consolidated Copper Mines Ltd. (1965) 58 I.T.R 241 where it was highlighted that it would be misleading to suppose that in all cases securing a benefit for the bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in amount to foreign collaborator on signing of agreement and Royalty subsequently. Court said that in order to decide whether a particular expenditure is "Capital" or "Revenue", there is no rule of thumb or test of principle or universal application. In fact dividing line between two is very thin. The scrutiny is to be made in respect of the nature and character of the business, the object for which expenditure has been incurred and it is not an individual test but totality or cumulative effect of all the relevant facts and circumstances which would help in arriving at a particular inference. It referred to an extract from a Full Bench judgment of Lahore High Court in Benarsidas Jagannath, In re (1947) 15 ITR 185, which was approved in Assam Bengal Cement Co.Ltd. Vs. CIT (Supra) which reads as under: "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... It entered into two separate collaboration agreements dated 15.3.1961 and 31.3.1961 with M/s Metrimpex Hungarian Trading Company, Budapest for manufacture of microscopes and theodolites. Foreign Company agreed to supply Indian company all 'Technical know-how' required for manufacture of two instruments namely microscopes and theodolites. The object was to enable Assessee to manufacture said instruments of certain specifications. Assessee acquired right to manufacture in India, under its own trade mark, and name but under the licence-MOM Hungary-of the Foreign supplier, the said instruments, and right to sell the same in India. Assessing Officer held that payment made for acquiring 'Technical know-how' amount to 'Capital Expenditure' since no tangible or depreciable asset was brought into existence, hence no depreciation can be claimed. Appellate Authority, in appeal, preferred by Assessee took the view that what Assessee had done was to make an outright purchase of certain specimen drawings, charts, plans, etc, on special papers and these documents collected together, constituted a book on which depreciation would be allowable. In further appeal, Tribunal o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... supply to Assessee, the "sub-cultures of the Meiji's most suitable penicillin-producing strains", the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow-sheet of the process on a pilot plant, the design and specifications of the main equipment in such pilot plant, arrange for the visits to and training at Assessee's expense, of technical representatives of the Assessee, Meiji's plant at Japan and to advise Assessee in the large scale manufacture of penicillin for a period, limited to 2 years from the effective date of the agreement. It was also stipulated that technical know-how supplied by Meiji was to be kept confidential and secret by Assessee. It was prohibited from parting with technical know-how in favour of others or to seek any patent for the process. Assessing Authority held that expenditure was in the nature of acquisition of an asset or advantage of an enduring benefit, therefore, it was a capital outlay and hence, declined deduction. This view was affirmed in appeal by Commissioner as well as Tribunal. At the instance of Assessee, reference was made to High Court who answered the q....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id test or description. It has to be derived from many aspects of the whole set of circumstances, some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all guiding features which must provide the ultimate answer. Court said that the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of "Capital" or "Revenue" a judicial fetish. What is 'Capital Expenditure' and what is 'Revenue' are not eternal varieties but must need be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability, appropriate to the context. It was clarified that the phrase 'enduring benefit' in British Insulated and Helsby Cables Ltd. v. Atherton, 1926 A.C. 205,213 (HL), was not thinking of advantages that are permanent. There is a difference between the lasting and everlasting. The time over....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be a "capital receipt". Assessee lost before Commissioner as well as Tribunal in appeal and also in High Court and therefore, in last, matter came to Supreme Court. The questions considered by Court, were (i) whether a particular payment made by an Assessee under the terms of the agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors, namely, whether Assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; (ii) whether the improvisation made, is the part and parcel of existing business or a new business was set up with the so-called technical know-how for which payments were made; (iii) whether on expiry of the period of agreement, Assessee is required to give back the plans and designs which were obtained, but the Assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; (iv) what is the cumulative effect on a construction of the various terms and conditions of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o a specific dimension and in furtherance thereof, agreement was executed wherein foreign company agreed to supply 'Technical know-how' in the form of workshop drawings, documentation for basic engineering on structural components and individual parts, not manufactured by foreign company itself, data on necessary special tools and special manufacturing techniques, assembly instructions, arrangement drawing of the mill, foundation and loading plan, operation and maintenance instructions, information on the storage of spare parts etc. The agreement allowed to make use of the 'Technical know-how' to manufacture the mill at its workshops in India, to sell the mill within India without any limitation and also to export the mill to Countries other than certain Counties mentioned in the agreement. Assessee was entitled to use know-how for the purpose of performing under agreement only and keep such documentation confidential even after termination of agreement. This Court referred to various authorities as we have discussed above and held that under the agreement there was no absolute parting by the assessee with his technical know-how. The consideration received was for i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1. Thus one of the test laid down in M/s Jonas Woodhead & Sons Ltd. Vs. The Commissioner of Income-Tax (Supra) that, a completely new plan with a complete new process with new technology for manufacture of product was brought into existence is satisfied. Technical know-how was not made for betterment of existing product. Similarly second condition, whether it was improvisation of existing business or new business is also answered by reiterating that a new business was set up with so called technical know-how for which payments were agreed. Though period of technical collaboration for payment of technical know-how and royalty is mentioned in terms of 'tenure' but a close scrutiny of agreement shows that in case of termination of agreement, joint venture itself would come to an end and there may not be any further continuance of manufacture of product with technical know-how of foreign collaboration. Virtually, life of manufacture of product in the plant and machinery, established with assistance of foreign company is co-extensive and there is no distinction whatsoever. The agreement admittedly is framed in a manner so as to give a colour of licence for a limited period havin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that "Technical Know-how" fee and 'Royalty' were paid for acquiring and bringing into existence and advantageous assets. Hence, the said expenses would qualify to be termed as "Capital Expenditure" and not "Revenue Expenditure". We are also fortified in taking the above view in the light of judgment in Commissioner of Income Tax vs. Ciba of India Limited (Supra). The agreement was crucial for setting up plant and machinery for manufacturing the project and major stockholder was foreign company i.e. HMCL Japan. Without said agreement, the business in question could not have been started or run or continue to run and with the end of the agreement business will also come to halt. 55. From whatever angle it is, the result would be same that expenditure in question is nothing but "Capital Expenditure" and not "Revenue Expenditure", hence, not deductable under section 37 of Act 1961. All the factors which we have considered would go to show that assessee had obtained advantage of enduring benefit by payment of lum sum fee, though in installments. 56. CIT(A) in its order dated 22.03.2007 in Appeal Number 45/2006-07 for AY 2003-2004, has affirmed findings of A.O. with regard....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Government of India so as to imply that the technical know how passed is of revenue nature, or "approval" does not place the assessee beyond the provisions of Income Tax Act. The most important question here is as to why and for what the payment is being made and the answer to this is that it is payment for technical know how as passed on a particular date, for which payment has been made/was to be made and the said amount, under reference, is one of the installments which was to be paid for the said technical know-how. In effect, it is a one time expenditure of capital nature, the payment of which has been staggered over 5 years because, as per company's own projection, the company being in loss, was to pick up its car sale business and generate profit. It is for this reason that is was decided to make the payment of technical know how fees in 5 equal installments. As such this was an act of convenience for a one-time capital expenditure. The appellant's plea that the know-how related to manufacturing process is usually an expense in the year in which it is incurred, has no force because, as discussed above, this is not a case where the business was al....