TaxTMI 
TaxTMI 
2017 (6) TMI 524
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....ly because of the reason that same issue has occurred in different Assessment Years, i.e., for the years 1999-2000, 2001-2002, 2002-2003, 2003-2004 and 2005-2006. 2) M/s. Honda Motors Company Limited, Japan (hereinafter referred to as "HMCL, Japan") had entered into a joint venture dated September 12, 1995 with M/s. SEIL Ltd., a company incorporated under the Indian Companies Act. After getting necessary approval from the Government of India, a joint venture company in the name of the assessee was incorporated. After incorporation of the assessee as a joint venture, An agreement dated May 21, 1996 between HMCL, Japan and the assessee was entered into, known as 'Technical Collaboration Agreement' (for short, 'TCA'). As per the TCA, HMCL, Japan which is engaged in the business of development, manufacture and sale of automobiles and their parts agreed to give 'license' and 'technical assistance' to the assessee. The TCA also stipulated different kinds of technical know-how and technical information which were to be provided by HMCL, Japan (as a licensor) to the assessee (as a licensee). For providing the aforesaid facilities, it was agreed that a consideration/lump sum fee of 30.5 ....
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.... almost owned by HMCL, Japan, having around 99% shares and Seil India (local Indian company) owned only 1% shares. 9. Thereafter, M/s. HMCL, Japan who held about 99% share of joint venture company/subsidiary company, i.e., Assessee, entered into an agreement on 21.5.1996 with HSCIL/Assessee which is called as "Technical Collaboration Agreement". Agreement stipulated and termed HMCL, Japan as "licensor" and HSCIL/Assessee as licensee." 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 pay royalty of 4%, both on internal and exports, subject to taxes. Article 14 of agreement which talks of lump sum fee and royalty reads as under: "14.1 In consideration of the right and licence granted to licensee under Article 2 hereof and of the furnishing of the Technical Information under Article 4.2 hereof, licensee shall pay to LICENSOR the following fees: 1. Lumpsum fee: The amount of l....
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....nsee 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's engineers) at a factory or factories of LICENSOR or any of its designers, including but not limited to technical guidance fees, per dien allowances, traveling expenses, staying or living expenses and other incidental expenses, shall be payable by licensee to LICENSOR in accordance with such" Memorandum on Exchange of Technicians", separate from and i....
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....e 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 which licensee then has on hand and which remain unsold and unused at the time of the expiration or termination of this Agreement; 6. LICENSOR may at its option sell, directly or indirectly, the Products and the Parts repurchased by it under paragraph (5) above....
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....l mean those patents, utility models design patents and other intellectual property rights directly relating to the Products or the licensed parts themselves relating to the manufacture of the products or the licenced parts (including many pending applications thereof, but excluding trademarks, and excluding patents utility models design patents and other intellectual property rights relating to the Manufacturing Facilities and the manufacture thereof) 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 licensee. 6. The term "know-Hose" shall mean any and all secret technical information (except for the Intellectual Property Right), whether in writing or not, including but not limited to drawings, standards, specifications, material lists, process manuals and direction maps, which directly relates to the products or the licenced parts themselves 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 under which Licensor is entitled to grant a licence to li....
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....come to the aforesaid conclusion was that there was no existing business which needed to be improvised with the aid of technical know-how. This TCA was executed with the aim and objective to establish a new unit for manufacture of automobiles and parts thereof. Therefore, a new unit was brought into existence in the form of assessee on which HMCL, Japan, a foreign company, had absolute control as it held 99% shares in the joint venture. Further, technical know-how agreement for technical collaboration which not only included transfer of technical information, but, complete assistance, actual, factual and on the sport, for establishment of plant and machinery etc. so as to bring into existence manufacturing unit for the products. The Agreement also provided for continuous assistance at every stage. The High Court was of the opinion that in the aforesaid circumstances, the test laid down by the Full Bench of Madras High Court in M/s. Jonas Woodhead and Sons (India) vs. Commissioner of Income Tax (1979 (117) ITR 55) becomes applicable which is to the effect that whenever a complete new plant with a complete new process, with new technology for a manufacture of product is brought in....
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....-how and, therefore, the expenditure in-question was capital expenditure. He further submitted that the view which was taken by ITAT was un-sustainable and, therefore, rejected by the High Court. Referring to the reasoning given by the High Court in the impugned judgment which is already taken note of above, his submission was that the same should be accepted. 13) We have considered the respective submissions of counsel for the parties on either side. First thing which is discernible in the impugned judgment of the High Court is that the High Court has proceeded entirely on the basis that technical know-how was used for setting up of a plant for manufacture of automobiles. Judgment of the ITAT, on the other hand, reveals that it had arrived at a contrary conclusion. 14) Record reveals that simultaneously with the signing of TCA, certain other agreements were also entered into between HMCL, Japan and the assessee on May 21, 1996. 15) Nomenclature of these three agreements is already taken note of above. These are 'Memorandum on Exchange of Technicians', 'Memorandum on Supply of Parts' and 'Memorandum on Supply of Manufacturing Facilities'. The Tribunal went into the nature ....
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....the test applied was as to whether the expenditure, whether incurred at the time of setting up of the business or later, acquisition of technical know-how or was only for the use of the know-how for a particular period. Applying the aforesaid test, the Tribunal found that TCA in-question gave a limited right to the assessee to use the technology with no ownership or proprietary rights therein. 16) The aforesaid conclusion recorded by the ITAT has been upset by the High Court in the impugned judgment. It would be pertinent to point out that even the High Court has not interpreted the clauses of the TAC to conclude that proprietary rights in the technical know-how stood acquired by the assessee. It has proceeded on the basis that it was only right to use the technical know-how which was given. Its conclusion rests entirely on the basis that the technical know-how was given for setting up of the new plant. It is this difference of opinion which is to be settled here. 17) A reading of the TCA would bring out the following pertinent aspects: "(a) the appellant was granted indivisible and non-transferable right to manufacture in India the range of products using know how/t....
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....oyalty paid for use of such technical information or know-how would be in the nature of revenue expenditure as no enduring benefits is acquired thereby. This was so held in a classic case, entitled Commissioner of Income Tax, Bombay City I v. Ciba India Limited (1968) 69 ITR 692 (SC). 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 make use, exercise and vend the inventions referred to therein and to use the trade marks set out in Schedule-II in the territory of India, this Court held that what was conferred was a mere right to use. The Indian assessee, it was observed, was not entitled to exclusive rights to patents, trademarks etc. As per the agreement, proprietary information was not to be divulged to third parties without consent. The rights granted enabled access to the technic....
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.... 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. (iii) The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. 20) It was also held that three aspects should be considered, (a) the character of the advantage sought, and in this, its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part and (c) the means adopted to obtain it. 21) The decision went in favour of the assessee primarily on the ground that the assessee in that case was already engaged in the preparation of antibiotic since long. Therefore, it could not 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 operation for the commercial production of penicillin in the assessee's existing plant had become obsolete or inappropriate in relation to the exploitat....
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....nue" 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. 22) When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collabo....
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....orm of royalty paid would be in the nature of capital expenditure and not revenue expenditure. The Tribunal is conclusion that it is only the other three memoranda which were necessary for setting up the manufacturing facilities and payment thereunder would qualify as capital expenditure, and not the payment of technical fees/royalty on the ground that this Agreement was not in connection with the setting up of a plant or manufacturing facilities, is not correct. It would be interesting to note that even the Tribunal had nurtured doubt on the nature of this expenditure as TCA was signed simultaneously with the other memoranda to facilitate setting up of a new factory and not improvising the earlier set up. This doubt has expressed by the ITAT itself in the following words: ""Our doubt was why the payment, at least of the lump sum technical know-how fees, cannot be considered as being connected to the initial starting up of the business and hence not allowable since the know-how was bring obtained for the first time and was crucial to the setting up of the business of the assessee which undisputedly was to manufacture Honda cars in India. It may be recalled that this was al....