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2010 (12) TMI 801 - AT - Income TaxDeduction u/s 35AB - Technical know how fees - issue is covered by the decision of the tribunal in assessee s own case in assessment years 1994-95, 1995-96 and 1996-97 in ITA Nos.5153/M/98 and 5687-5688/M/99 wherein it was held that though the assessee had not itself manufactured the goods, it had got the goods manufactured from others for which technical know how had been used. The tribunal also observed that there was no requirement in section 35AB that the assessee should itself manufacture the goods - Decided in favor of the assessee by way remand to AO Regarding disallowance u/s 40(a)(i) - assessee argued that the amounts received by the foreign telecasting companies were not taxable in India and therefore no tax was required to be deducted at source - the same issue had already been considered by the tribunal in assessee s own case in assessment years 1994-95 to 1996-97 in ITA No.5153/M/1998 and 5687-5688/M/199 Regarding termination of the manufacturing agreement for manufacture of detergent bar - It has been pointed out that after the termination, sales and profit both had improved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure - It is a settled legal position that in case an expenditure is incurred for better working of the existing profit earning apparatus, it will be revenue in nature but in case the expenditure relates to any change in the profit earning apparatus the expenditure would be capital in nature - the termination of managing agencies did not relate to the profit earning apparatus of the assessee and by termination the assessee could only gain advantage in the revenue field by way of saving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termination of JVA which had impact on the profit earning apparatus - Held that expenditure is capital in nature Regarding nature of payment of Rs.21 crores made by the assessee to GSL under safeguard confidentiality agreement - The payment had been made in terms of the confidentiality agreement dated 30.7.96 - GSL had acquired any confidential information for which the assessee had to make payment for protecting the information. As the purpose of payment is not established the expenditure cannot be allowed as incurred wholly and exclusively for the purpose of business - the purpose for not disclosing the information to any one else by GSL is also to ward off competition by not allowing others to use the information for manufacture of product. Therefore the real purpose of payment in such scenario assuming that GSL did have in its possession some confidential information would be to ward off competition - Held that payment was capital in nature - Appeal is dismissed
Issues Involved
1. Disallowance of deduction under section 35AB of the I.T. Act. 2. Disallowance of expenditure on advertisement fees to foreign telecasting companies under section 40(a)(i). 3. Disallowance of expenditure on advertisement films and radio programs. 4. Disallowance of non-compete fees. 5. Disallowance of payment to Godrej Soaps Ltd. (GSL) for termination of the manufacturing agreement. 6. Disallowance of amortized payment under the 'Safeguard' Confidentiality Agreement. Issue-wise Detailed Analysis 1. Disallowance of Deduction Under Section 35AB of the I.T. Act The assessee claimed a deduction of Rs.33,33,333/- under section 35AB, related to technical know-how fees paid to Procter and Gamble India Ltd. (PGI). The AO disallowed the claim, stating the assessee was a trading company, not a manufacturing company. This issue had been previously considered by the tribunal, which observed that the assessee used the technical know-how in its business, regardless of whether it manufactured the goods itself. The tribunal restored the issue to the AO for fresh examination and hearing, and this decision was followed for the current assessment year. 2. Disallowance of Expenditure on Advertisement Fees to Foreign Telecasting Companies The AO disallowed Rs.49,91,847/- paid to foreign telecasting companies for advertisement, as no tax was deducted at source, invoking section 40(a)(i). The assessee argued that the payments were not taxable in India. The tribunal had previously restored this issue to the AO for fresh adjudication, considering circulars and the nature of services rendered outside India. The tribunal followed the same approach for the current year. 3. Disallowance of Expenditure on Advertisement Films and Radio Programs The assessee's claim of Rs.3,66,65,058/- for advertisement films and radio programs was disallowed by the AO as capital expenditure. The CIT(A) had restored the issue to the AO to consider limitations under Rule 6B. The tribunal, referring to its decision in Metro Shoes Pvt. Ltd., held that such expenditure is revenue in nature, necessary for keeping public interest intact in the products. The tribunal set aside the CIT(A) order and allowed the claim. 4. Disallowance of Non-Compete Fees The assessee paid Rs.1,40,62,500/- as non-compete fees to GSL. The AO and CIT(A) treated it as capital expenditure. The tribunal referred to the Special Bench decision in Tecumseh India Pvt. Ltd., which held that non-compete fees for a period of five years provided enduring benefits and constituted capital expenditure. The tribunal upheld the CIT(A) order. 5. Disallowance of Payment to GSL for Termination of the Manufacturing Agreement The assessee paid Rs.7 crores to GSL for early termination of a manufacturing agreement. The AO and CIT(A) treated it as capital expenditure. The tribunal observed that the payment was related to the termination of the Joint Venture Agreement (JVA) and restructuring of the business framework, impacting the profit-earning apparatus. The tribunal held that the expenditure was capital in nature and upheld the CIT(A) order. 6. Disallowance of Amortized Payment Under the 'Safeguard' Confidentiality Agreement The assessee paid Rs.21 crores to GSL under the 'Safeguard' Confidentiality Agreement and claimed Rs.3 crores as amortized expenditure. The AO and CIT(A) treated it as capital expenditure, arguing it was for restructuring the business framework and to ward off competition. The tribunal found no evidence of confidential information exchange and concluded that the payment was to ward off competition, thus capital in nature. The tribunal upheld the CIT(A) order. Conclusion - The appeal for A.Y. 1997-98 is partly allowed. - The appeals for A.Y. 1998-99 and 1999-2000 are partly allowed for statistical purposes. - The appeal for A.Y. 2000-01 is dismissed. The decision was pronounced in the open court on 15.12.2010.
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