TMI Blog2011 (9) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... iture primarily on the ground that it is a capital expenditure. The facts in brief as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act, 1961 dated March 30, 2004 were that the assessee-company is in the business of manufacturing of ball-bearings. It was stated by the Assessing Officer that the assessee was in the said business since 1996. It was noted by the Assessing Officer that an agreement was entered into between the assessee and FAG Automobiltechnik AG dated March 30, 2000. That agreement was in respect of a know-how to be provided by the said collaborator to the assessee, called as Indian company. That know-how was in respect of manufacturing of certain kinds of ball-bearings listed therein. As per clause 2 the character of the know-how was as follows: "2. The know-how shall : (a) be in line with the process of manufacture of the products being followed by the Indian company ; and (b) include : (i) developments and improvements in the said process of manufacture ; (ii) designs of the products ; (iii) selection of machinery and equipment for the manufacture of the products ; (iv) design(s) of the plant/s for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me meaning as in Explanation 2 to section 9(1)(vi) ; clause (B) of the Explanation to section 40(a)(i) coins a definition of the expression 'fees for technical services' shall have the same meaning as in Explanation 2 to section 9(1)(vii). Technical know-how for industrial information and technical services are covered under the provisions of section 32(1)(ii) of the Income-tax Act". In the result, the assessee's claim that the said expenditure was revenue in nature was disallowed. However, it was held that the assessee was eligible for claim of depreciation. The issue was carried before the first appellate authority. The learned Commissioner of Income-tax (Appeals) has discussed the clauses of the impugned agreement and related facts in detail. The learned Commissioner of Income-tax (Appeals) has also discussed certain case law. The learned Commissioner of Income-tax (Appeals) has also called for a remand report and in that remand report in respect of technical services of Rs. 43.10 lakhs it was reported that for the assessment year 2002-03 as well the said payment was capitalised and depreciation was allowed. It was also mentioned in the remand report that although the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in foreign exchange, whichever is earlier ; (2) a sum equal to 5 percent net of Indian taxes of the net ex-factory sale price of the products ; (3) the sums payable to the collaborator is payable also in respect of the products that may be in stock with the Indian company at the time of expiration or sooner termination of the agreement." The observation of the learned Commissioner of Income-tax (Appeals) was that as per the terms and conditions of the agreement there were two kinds of payment; one was a lump sum consideration and, the other was recurring in nature depending upon the net ex-factory sale price. As regards to the lump sum consideration, as per the learned Commissioner of Income-tax (Appeals), it was stated to be Rs. 43.10 lakhs. At that juncture, the learned Commissioner of Income-tax (Appeals) has quoted CIT v. Sarada Binding Works [1976] 102 ITR 187 (Mad) for the proposition that where a fixed annual sum is paid towards royalty, then the same is in the nature of capital expenditure. The learned Commissioner of Income-tax (Appeals) has therefore concluded that the said lump sum consideration was capital in nature, hence the action of the Assessing Officer was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the parties shall assign this agreement or any part hereof nor any right hereunder without the previous consent in writing of the other party. (f) Clause 13 The Indian company shall not during the currency of this agreement, except with the previous consent in writing of the collaborator, directly or indirectly, receive or seek to receive from any third party and know-how relative to the products. (g) Clause 14 The Indian company may export the products manufactured by it with prior approval in writing of the collaborators. (h) In terms of the clause 24(a) of the agreement, upon termination of the agreement, the Indian company has to return to the collaborators the know-how as has been provided to it by the collaborators." The learned authorised representative has also quoted a clarification of the Central Board of Direct Taxes dated July 9, 1969 in the following manner : "(F) It has been clarified by the Central Board of Direct Taxes vide Circular No. 21 (F. No. 7A/40/68-IT (A-II)), dated July 9, 1969 that if what has been acquired under the agreement is merely a licence for the user, for a limited period, of a technical knowledge of the foreign participant, togeth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ITO [2000] 73 ITD 189 (Delhi) 3. Wellman Incandescent India Ltd. v. Deputy CIT [1995] 55 ITD 338 (Calcutta) 4. Deputy CIT v. Metalman Auto P. Ltd. [2001] 78 ITD 327 (Chandigarh) 5. K. B. Mehta v. Deputy CIT [2004] 265 ITR (AT) 17 (Pune) ; [2003] 86 ITD 256 (Pune) 6. Eicher Motors Ltd. v. Deputy CIT [2004] 82 TTJ (Indore) 61 7. CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) 8. CIT v. Lucas-T. V. S. Ltd. (No. 1) [1977] 110 ITR 338 (Mad) 9. CIT v. Sarada Binding Works [1976] 102 ITR 187 (Mad) 10. CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) From the side of the Revenue, the learned Departmental representative Mr. Rabindra Kumar, Commissioner of Income-tax-Departmental representative appeared and supported the action of the Revenue authorities. In his opinion, as per the terms of the agreement the said collaborator has prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore for the acquisition of a new technology through which the assessee has been benefited for a long period hence the expenditure was nothing but capital in nature. We have heard the parties at some length. We have carefully perused the orders of the authorities below in the light of a voluminous compilation filed before us containing almost 400 pages and the case law cited. Before us, an agreement dated March 30, 2000 was referred to which was executed between FAG Automobiltechnik AG on one part referred as "the collaborator" and "FAG Bearings (India) Ltd." as other part mentioned as "the Indian company". The said collaborator is a subsidiary of FAG Kugelfischer Georg Schaefer AG incorporated under the laws of the Federal Republic of Germany. Clause (c) on page 1 of the said agreement states that the "Indian company" and the "collaborator" have over the years entered into diverse agreements for supply of know-how and technical assistance in respect of diverse types of bearings. The present agreement was in respect of know-how and technical services in respect of the following products. Clutch release bearings. Altemator bearings. Wheet bearings hub units (all genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se out of the original agreements which were in operation since inception of the company. In the light of the factual background, we have scrutinised the case law cited before us. We have noted that in one of the case it was held that if the payment is made for exclusive acquisition of technical know-how, then the expenditure is capital in nature, but if the payment is for securing the use of know-how, then allowable as revenue expenditure. In these decisions, it has been conveyed that the expenditure towards improvisation for the existing business is to be considered a revenue expenditure. In the present appeal, undisputedly the know-how related to the existing manufacturing operation of ball-bearings, i.e., stated to be same type of product. It cannot be ruled out that in a fast growing era of new technologies the outdated or obsolete technologies are required to be replaced and that expenditure can be held as business requirement. It has also been noted while reading the clauses of the agreement that one of the clause is about the non-portability. Therefore, this clause has demonstrated that the know-how was not the property of the assessee. Rather, the said collaborator has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : "At the time of hearing we were required to give submissions with respect to applicability of the provisions of section 40A(2)(b) of the Act for payments made to group companies on account of royalty. With respect to the same we submit as under. In paper book 2 at pages 45 to 47 we have given the summary of royalty paid under different agreements. We have also attached the summary of royalty payments made for various years on page 44. On the perusal of page 45 your kind office would notice that royalty is paid to the following companies : (a) FAG OEM Und Handel AG, Germany ; (b) FAG Kugelfischer Georg Schaefer AG, Germany ; and (c) FAG Automobiltechnik AG, Germany. It may be mentioned that the payment to party at (s) above was made at 1.5 percent for the months of April, 2000 and May, 2000 and at 3 percent for the remaining period till March 31, 2011. With respect to the increase in the rate of royalty we would like to put the following facts on record. The company was originally paying royalty at 1.5 percent under agreement dated February 24, 2000. The said agreement was effective from April 1, 1999 to March 31, 2004. Copy of the agreement is attached i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce between the appellant-company and the said foreign collaborator. According to him, the onus was on the assessee to prove that the price paid was reasonable. The assessee had furnished certain approvals for the payment of the know-how fees but that argument was dismissed by the learned Commissioner of Income-tax (Appeals) on the ground that those approvals were the requirement of the law but those approvals have not given a sanction to arbitrarily pay the know-how fees to a sister-concern. Those approvals were granted with a different angle considering the related law but not the Income-tax Act. He has concluded that the royalty at 1.5 percent both on domestic and export sales was reasonable and rest was excessive payment of royalty, therefore disallowed under section 40A(2)(b) of the Act. From the side of the appellant, Mr. A.V. Sonde argued that it was wrong on the part of the Commissioner of Income-tax (Appeals) to presume that FAG OEM Und Handel AG happened to be "a person" specified in section 40A(2)(b). For this proposition, the learned authorised representative has referred the constitution of the said collaborator. His next plank of argument was that it was the onus of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [1990] 181 ITR 230 (Delhi). From the side of the Revenue the learned Departmental representative Mr. Rabindra Kumar has placed reliance on the reasoning assigned by the first appellate authority for invocation of the provisions of section 40A(2)(b). His first vehement objection was that a new plea has been raised by the learned authorised representative that the said collaborator is not within the definition of the specified person as defined in section 40A(2)(b). The learned Departmental representative has contested that no such plea had ever been raised before the Commissioner of Income-tax (Appeals), therefore it is against the natural justice to raise an altogether new defence without granting an opportunity to the Revenue. The learned Departmental representative has also objected the argument of the learned authorised representative that the Revenue had not placed on record any comparable instance. According to the Departmental representative, there was no necessity to place several evidence on record when the agreements itself have demonstrated that there was an abrupt increase in the payment. Having heard the submissions of both sides at some length, we have noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreements of the assessee is not enough in our opinion because that plea may not stand in the eye of law having regard to the fact that the agreements were revised and that were stated to be revised because of legitimate business need. We have made these observations simply to throw certain suggestions, though apparently premature, but to avoid the repeated litigation. In the result, this issue of the assessee as raised vide Ground No. 2 is restored to the file of the Assessing Officer to be decided de novo needless to say after granting a reasonable opportunity of hearing to the assessee, hence allowed but for statistical purposes only. Grounds Nos. 3 and 4 read as under : 3. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in treating repairing expenses to plant and machinery of Rs. 46,58,516 as capital expenditure instead of revenue expenditure as claimed by the appellant. 4. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in treating repairing expenses to plant and machinery of Rs. 2,28,55,484 as capital expenditure inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the Assessing Officer was that in fact the assessee had not furnished particulars of repairing work carried out. A one sentence clarification was given that the expenditure was towards repairs. The Assessing Officer has also discussed the basic principle of accountancy that if repairs were incurred, then those should have been disclosed in the profit and loss account. By not disclosing in the profit and loss account, the true and correct picture of the business profitability could not be reflected. It has also been noted that other repairs and spares and tools were otherwise debited in the profit and loss account. So he has commented that there was no reason as to why the assessee had not included the impugned expenditure. Again, it was commented by the Assessing Officer that no details were furnished in respect of replacement of cost of furnace. In the absence of a justifiable explanation it was held by the Assessing Officer that the said expenditure of Rs. 46,58,516 was capital expenditure. In respect of the remaining claim of expenditure of Rs. 2,28,55,484 the entire amount was rejected and even not allowed as a capital expenditure because the assessee had failed to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee being restored back for de novo adjudication, hence may be treated as allowed but for statistical purposes. Ground No. 5 reads as under : 5. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the addition of Rs. 34.41 lakhs on account of interest received by the appellant on income-tax refund despite the fact that the said interest had not become final during the year under consideration. It was noted that the assessee has received interest under section 244A on income-tax refund. The said amount was not included in the computation of income. It was accordingly taxed in the hands of the assessee. When the matter was carried before the first appellate authority, a remand report was called for and after examining the details of the interest received by the assessee on income-tax refund, it was held that the same was liable to be taxed in the hands of the assessee. Now before us the learned authorised representative Mr. Milin Mehta has fairly informed that this issue now stood covered against the assessee by a Special Bench decision of Mumbai in the case of Avada Trading Co. P. Ltd. v. Asst. CIT [2006] 284 ITR (AT) 73 ; [2006] 100 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We have also examined the nature of repairs incurred by the assessee. Some of the expenditure was for replacement of old flooring, change of electrical wires, installation of partitions, etc. There are series of decisions, such as, CIT v. Chowgule and Co. P. Ltd. [1995] 214 ITR 523 (Bom) on this issue and placing reliance we hereby hold that sustenance of shed or building, etc., is definitely in the nature of "current repairs" as prescribed under section 31 of the Income-tax Act. Resultantly, following the law pronounced by the hon'ble court, we hereby direct to allow the claim. This ground is allowed. Ground No. 7 reads as under : 7. The learned Commissioner of Income-tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in considering software expenses of Rs. 26,95,590 as capital expenditure. The assessee has incurred expenditure on computer software, details as under : (Rs.) (a) Fees paid for use of Microsoft office 9,45,005 (b) Expenses incurred for use of e-mail facility 2,72,500 (c) Cost of Auto card for bearing design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 234B and section 234D of the Income-tax Act, 1961. This ground is merely charging of interest, however, chargeability as such is not in question therefore this ground is merely consequential in nature. In the result, the assessee's appeal is partly allowed. (B) Revenue's appeal, I. T. A. No. 816/Ahd/2006 Ground No. I reads as under : On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals), Baroda, has erred inI. deleting the disallowance of claim of Rs. 30,96,721 being the amount of lease rental paid to IDBI Ltd. and SBI Capital Markets Ltd. A sum of Rs. 30.96 lakhs was claimed as pre-paid rent to a financial institution. Admitted factual position was that it was a pre-paid expenditure. Therefore, the same was disallowed. When the matter was carried before the first appellate authority, following the past history of the case, however, without having discussion on merits, the claim was allowed. Now before us, it was fairly accepted by the learned authorised representative Mr. Mehta that vide a decision of the Special Bench in the case of Deputy CIT v. FAG Bearings India Ltd. [2008] 306 ITR (AT) 60 (Ahd) the issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed almost the same. During the current year, the assessee paid gross fee/royalty of Rs. 442.50 lakhs to FAG OEM Und Handel AG Germany as per agreement dated December 21, 2000. As per the terms and conditions of the agreement, the collaborator agreed to provide know-how for the manufacture of ball and roller bearings in respect of scheduled and nonscheduled items. Some of the clauses of the agreement which are relevant to the issue are reproduced below . . ." A view has already been taken that the payment was a "running royalty" and that know-how has not been acquired and that the assesse has got only right to use. It has also been held that the asset in question was the know-how in fact was the property of the collaborator and that the assessee had a limited right of use. After the expiry of the term the assessee is under obligation to return the know-how. We have also discussed few case laws as cited before us and thereafter held that the expenditure is allowable as revenue expenditure. On the same lines, for the impugned amount as challenged by the Revenue, we hereby uphold the findings of the Commissioner of Income-tax (Appeals) and therefore this ground of the Revenue is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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