TaxTMI 
TaxTMI 
2017 (1) TMI 729
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.... 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, hence, facts have been taken for convenience from Income ITA No.503 of 2008. Same questions of law are involved in all the other ....
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....oducts. 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 hereunder (hereinafter referred to as the "Supply Parts"), and (b) (I) the parts which may be locally manufactured by licnesee hereunder (including the pans locally man....
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.... 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 five continuous equal installments by licensee to licensor and payment thereof was to commence from third year after commencement of commercial production. Besides, licensee was also liable to pa....
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....l 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" referred to in Article 4 hereof the any and all fees, costs, expenses and other consideration for and in connection with the technical guidance provided by LICENSOR by dispatching to licensee technical experts (s) of LICENSOR and the technical training of licensee'....
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....nging 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 and to make the necessary inspection to confirm whether licensee is observing its obligations under this Article 21.1; 5. LICENSOR may at its option, but without obligation to do so, repurchase or cause to be repurchased at fair price agreed upon by the parties hereto, all or any portion of the Products and the Parts whi....
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....hi 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 royalty of Rs. 7,96,02,000/- to HMCL, Japan and claimed deduction, treating the same as 'Revenue Expenditure'. In the opinion of Assessing Officer (hereinafter referred to as 'A.O'), aforesaid income has escaped assessment since, it was a capital expenditure. Ultimately assessment order was passed on 24.8.2006, making an addition of Rs. 7,96,02,000/-, treating it....
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....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 payments made towards "technical know-how" and 'royalty' whether can be treated to be a "revenue expenditure" or "capital expenditure". 26. Basic contention raised on behalf of Revenue, i.e. appellant before us is that 'Technical know-how' and 'Royalty' payments are of enduring nature and therefore, same would qualify and liable to be treated as 'Capital Expenditure' and not 'Revenue Ex....
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....dustrial 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. Even earlier activities of company of Assessee, i.e incorporation of joint venture, approval from Government of India and foreign collaboration is for manufacture of motor car on proposed location. All these would show that firstly plant and manufacturing faculties were to be set up, and technical collaboration was foundation for this purpose. Apparently it was not towards improvement or running of existing business more efficientl....
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....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 know-how' and 'Royalty' would qualify to be treated as 'Revenue Expenditure' or 'Capital Expenditure', as it is well known, if it is 'Revenue Expenditure', Assessee would be entitled for deduction from income and if 'Capital Expenditure', it would be taxable. 32. The term 'Revenue Expenditure' as such is not defined in the Act, 1961. Thus term 'Revenue Expenditure' was expla....
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....e 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 and experience for the purpose of carrying its business and was merely a licensee for a limited period of technical knowledge of Swiss company with right to use patents and trade works of that company by making that technical knowledge available. Swiss company did not part with any asset of its business nor did the Assessee acquire any assets or part in the nature of benefits or advantage. 34. In L.B. Sugar Factory and Oil Mills (P) Ltd, Pili....
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....iew 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 business, would be prima facie capital expenditure so long as the benefit is not so transitory as to have no endurance at all. Court relied on its earlier decision in Empire Jute Company Ltd. Versus Commissioner of Income Tax (1980) 124 ITR 1 (SC) that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. Court furth....
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.... 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 to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or ....
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....e 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 observed that some of the services of Foreign Collaborator do qualify for 'Revenue' account and therefore, to the extent, services qualified for 'Revenue' account, may be allowed to be deducted and rest may be added. In appeal Supreme Court considered the question, whether 'Technical know-how' in the shape of drawings, designs, charts, plans, processing data and other literature falls within the definition of "Plant". It replied aforesaid question by r....
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....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 question against Assessee. Hence matter went in appeal to Supreme Court. Referring to some earlier judgments, Court culled out certain principles laid down therein to determine, whether expenditure of Assessee was 'Capital Expenditure' or 'Revenue Expenditure' and said : "(i) 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 trade, I think that there is very good reaso....
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....itions; 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 which the thing 'endures' is a matter of degree and one element only to be considered. Thereafter Court looked into the process of making antibiotics and penicillin and observed that Indian company was already engaged in the preparation of antibiotics since long. In the background facts, Court held, it cannot be said that the area of improvisation by obtaining know how from foreign collaboration was not a part of improvisation of existing business or that the entire gamut of existing manufacturing opera....
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.... 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 the agreement and (v) whether Assessee derived benefits coming to its capital for which the payment was made. 45. Relying on tests laid down in the earlier authorities including Alembic Chemical Works Co. Ltd, vs Commissioner Of Income Tax (supra), Court decided the issue against Assessee observing that under the agreement with foreign firm Assessee had to set up a new business and foreign firm had not only furnished information and technical know-how but also rendered valuable services in setting-up of the factor....
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....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 imparting know-how not in association with the disposal of a capital asset. It was a for a limited period, not permanently, and not for establishment of any plant or machinery but for manufacture of equipment and machinery for Cane Sugar Plant. Hence, it was not of enduring nature and a ''Revenue Expenditure' and not ''Capital Expenditure'. This decision evidently makes it clear that therein agreement and parting of Technical know-how was not for establishment of plant and machinery but for manufact....
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....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 having no enduring nature but a close scrutiny of agreement shows otherwise. Various tests laid down in judicial precedents as discussed above, have been attempted to cover up by giving colour to agreement that it is not of enduring nature. The fact however is otherwise, when we read the entire agreement in consonance, harmony and together. 52. Agreement provided that in the event of expiration or otherwise termination, whatsoever, licensee, i.e., joint venture company/Assessee shall discontinue manufacture, sale and other disposit....
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....greement, 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 to "Technical Know-how" fee so as to be treated as 'Capital Expenditure' holding as under: "Beyond doubt, it is established that but for the technical know how provided, the plant would have neither come into existence nor could have started manufacture of vehicles. The technical know how provided enabled the setting up of the manufacturing activity/plant. The A.O. has rightly observed that the technical collaboration agreement was made for setting up of the plant and not towards improvement or running of an existing busines....
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....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 already in existence. The technical information provided is not for day-to-day running of the company and as such cannot be treated as a revenue expenditure." 57. We also find from record that at the time of entering into "Technical Know-how" agreement, HMCL had only 60% of share holding in HSCIL/Assessee but only in AY 2004-2005, it increased its share holding to 99% and above and thus got virtually entire control and ownership over the alleged joint venture. A.O. has found this exercise as diversion of profit. Assessee explained it to be in accordance with Government policy. Ev....