TaxTMI 
TaxTMI 
TaxTMI 
2021 (7) TMI 717
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....ts, in the circumstances and in law while disallowing depreciation amounting to INR 10,07,066/- on account of reclassification of certain assets as 'Building other than Residential', eligible for depreciation at 10%, which were originally classified by the Appellant as 'Plant and Machinery', eligible for depreciation at 15%. 2.1 The Ld. AO/Hon'ble DRP has erred on the facts, in the circumstances and in law by not considering the detailed nature and use of such assets. 3. The Ld. AO/Hon'ble DRP has erred on the facts, in the circumstances and in law while disallowing the amount of INR 2,99,88,750/- (net of depreciation) on account of capitalization of 25% of Technical Know-how Fee incurred by the Appellant in the subject year, on the ground that such expenses have resulted in benefits of enduring nature to the Appellant and thereby constitutes a capital asset. 3.1 The Ld. AO/Hon'ble DRP has erred on the facts, circumstances and in law in no appreciating that the Technical Know-how has been utilized for smooth running of the business of the Appellant and has not lead to acquisition of any new capital asset. 4. The Ld. AO/Hon'ble DRP has erred o....
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....e of Rs. 87,12,690/- on the ground that additional depreciation is allowable only for acquisition and installation of new plant & machinery and not for replacement of parts of plant & machinery already in existence/use. We find the ld. CIT(A) upheld the action of the Assessing Officer on the ground that the various items on which additional depreciation has been disallowed are not new machinery which has been purchased by the assessee, but, it is in the nature of repair and maintenance of existing machinery. It is the submission of the ld. counsel for the assessee that when the Assessing Officer has allowed normal depreciation on the plant & machinery which was purchased during the year, therefore, the assessee is entitled to additional depreciation on plant & machinery. We do not find any merit in the arguments advanced by the Ld. counsel. The provisions of section 32(1)(iia) clearly mention that in the case of any new machinery or plant which has been acquired and installed after the 31st day of March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to 20% of the actual cost of such machinery or plant shall be ....
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....by the assessee on this issue." 5.4. Respectfully following the order of the Co-ordinate Bench in assessee's own case in Assessment Year 2011-12, we dismiss ground Nos. 2 & 2.1 of the assessee's appeal. 5.5. Ground Nos. 3 & 3.1 challenge the addition of Rs. 2,99,88,750/- (net of depreciation) on account of capitalization of 25% of Technical Know-how fee. The Assessing Officer had held that 25% of the technical Know-how expenses of Rs. 15,99,41,000/- was to be treated as capital expenditure spent towards acquisition of capital assets. Accordingly, depreciation claim was reduced by Rs. 2,99,88,750/- by the Assessing Officer. We note that identical issue had come up before this Tribunal in 2011-12 also in assessee's own case and this issue was decided in favour of the assessee by the Tribunal. The relevant observations of the Tribunal are contained in paragraphs 22 to 27 of the order of the ITAT and the same are being reproduced herein under for a ready reference: "22. We have heard the arguments made by both the sides, perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decision....
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.... line of the assessee is of a particular nature which would require updating everyday like software industry or manufacturing of highly sophisticated instruments. The argument of the assessee that it would return all the designs according to him appears worth paper argument only because in a cement manufacturing plant, if the designs have been used for making the business process the changes are irreversible. It is the submission of the ld. counsel that the assessee has to continuously upgrade plant efficiency by employing modern and latest techniques to reduce costs and improve its productivity and quality. The expenditure on technical know-how was incurred by the assessee for technical information and assistance provided by HCA for the various services that were to be rendered by HCA to the assessee. It is also his submission that the benefit of the technical know-how does vest once and for all thereby resulting in an enduring benefit or for the purposes of bringing into existence any asset or advantage of an enduring nature, rather, the object of the technical assistance was for running the business effectively and profitably. Further, it is also his submission that the payment ....
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....said payment under section 37(1). The Assessing Officer rejected assessee's claim holding that it was in the nature of capital expenditure; and the Tribunal, however, allowed assessee's claim on revenue's appeal. 24. On appeal filed by the Revenue, the Hon'ble High Court held as under:- "14. What is placed before us is the "licence and technical assistance agreement" dated 2nd June, 1995 for the territory of India. The term 'intellectual property right' stood defined to mean those patents, utility models, design patents and other intellectual property rights relating directly to the products or the licensed parts thereof or to manufacturing of the products and their licensed parts, but excluded trademarks, patents, utility models, design patents and intellectual property rights relating to the manufacturing facilities and the manufacture thereof. The term 'know-how' was defined as any or all secret, technical information except for intellectual property rights, whether in writing or not, including but not limited to drawings, standards, specifications, material list, process manuals and direction maps etc. directly related to products or licensed....
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.... terminated by 60 days' notice to the defaulting party, if it failed to cure the same within the notice period. The agreement could also be terminated forthwith by a party, if the other party had transferred whole or an important part of business; went into liquidation, bankruptcy or insolvency; merged with, or was directly or indirectly transferred to third party; or on significant change in shareholding ownership. (4) Upon expiration of the term of the agreement, i.e. after 10 years, or termination due to default of performance of obligations, the respondent assessee could continue to manufacture, assemble, sell or deliver services but subject to due performance of their obligations, including payment of royalty. (5) In the event of pre-mature termination, i.e. within 10 years, except due to default of performance of obligations, the respondent assessee was to promptly discontinue manufacturing activities, sale and other dispositions of the products and the parts, as well as the use of intellectual property right and technical information. (6) Further in the event of expiration or termination, the respondent was to promptly return all documents and tangible properties i....
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.... (14) The respondent could not, without Honda's prior written consent, directly or indirectly or through its subsidiary, affiliate, distributor or agent or any other party, carry on or participate in the business of manufacturing, assembling, distributing or otherwise dealing in two/three wheelers of other parties. (15) On the question of consideration payable, Article 25 of the Agreement provided for fees under two heads namely, (1) Model Fee; and, (2) Running Royalty. a. 'Model fee' was payable on model change under the new model agreement. It was non-refundable and non-creditable against other payments. The agreement in addition stipulated the amount of model fee payable in respect of the product, "C-100" of US$ 10,00,000/- was payable in three equal instalments; i.e., (i) within first 60 days of the agreement being taken on record by the Government authorities in India; (ii) within 60 days of Honda delivering to the respondent the technical information necessary for manufacture and assembly; and, (iii) within 60 days after the parties confirmed in writing that the manufacture of the model had commenced on commercial basis, or 4 years after the agreement, whichev....
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....." 25. We find the Hon'ble Delhi High Court in the case of CIT vs. G4S Securities System (India) P. Ltd. (supra), has observed as under:- "9. From the terms of the agreement it is noticed that this arrangement was for a period of 5 years, which may be extended by another period of 5 years unless either party gives 6 months notice to the other party prior to the end of such 5 years period. The payment of commission @ 1% was based on the net sales and not lumpsum. On the termination of expiration of the sub license agreement, the assessee was to return all G4F knowhow obtained pursuant to the said agreement. Not only that, the assessee was not even entitled to make use of the trade mark name or G4F knowhow and was forthwith to change its' corporate and/or trade names. All rights and knowhow, therefore, continued to vest in G4F and it was only the right to use the knowhow that was made available to the assessee and that too based on its net sales. That means all the royalty paid in the shape of 1% of net sales for the use of trade mark and right to use knowhow could not be considered to be of enduring nature and thus capital expenditure. The expenditure was to be of revenu....
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.... the three appeals." 26. We find the Hon'ble Allahabad High Court in the case of CIT vs. UPCOM Cables Ltd. (supra) has observed as under:- "35. The question as to whether a particular payment made towards technical know-how fee or royalty to a Foreign Company in lieu of an Agreement will be a "capital expenditure" or "revenue expenditure" would depend upon facts of individual case, and, in particular, various terms of Agreement involved therein. 36. In the present case, a concurrent finding has been recorded by CIT(A) and Tribunal both that on termination of Agreement, which was for a period of five years, Assessee would return all relevant material relating to know-how acquired through Agreement. This is one of the relevant consideration observed in Alembic Chemical works Ltd. (supra) to hold that in such a case, payment towards 'Royalty' would be 'Revenue expenditure' and not 'Capital'. The agreement also shows that it was not an exclusive right available to the Assessee, inasmuch in para 13 of Annexure, of foreign collaboration, approval accorded by Government of India provides that in case item of manufacture is one which is patented in India, ....