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2011 (12) TMI 351 - AT - Income TaxDisallowance of license and technology fees - Revenue or capital expenditure - assessee was a joint venture formed between Burlington Mills Inc., USA (BMI) and Mafatlal Industries Ltd. (MFI) and known as Mafatlal Burlington Industries Ltd for manufacture of certain special form of denim fabrics - assessee, entered into the License and Technical Assistance Agreement dated 13.06.1996, separately with BMI and MIL to provide for licensing of technical information and trade mark to the assessee on payment of license and technology fees @ 4% of the sales to each of them in respect of sales made through them - AO observed that, in the relevant years, there was no reimbursement of expenses for deployment of personnel of both the companies for providing any technical assistance and, therefore, the entire payments in the form of license and technical fees had to be considered for the use of trade mark or technical information - AO concluded that the technical information was a capital asset acquired by the assessee with the right to use in perpetuity and the royalty paid @ 2% of net sales was capital in nature - license and technical co-operation agreement only grant the license to the assessee to use the trade mark as well as the technical information owned by BMI and MIL - High Court of Bombay in the case of Genon Norton Metal Diamond Dies Ltd. (1983 -TMI - 26281 - BOMBAY High Court) - Decided in favor of the assessee Regarding book profit u/s. 115JB - The dispute is regarding the allowability of deduction on account of profit eligible for deduction u/s.80HHC while computing the book profit u/s. 115 JB under the provision of Clause (iv) of Explanation 1 of Section 115JB(2) - Held that there being no eligible profit of business for the purpose of deduction u/s.80HHC, the claim of deduction of the assessee has been rightly disallowed by the AO - Decided against the assessee
Issues Involved:
1. Disallowance of license and technology fees, treating them as capital expenditure. 2. Computation of book profit under Section 115JB. 3. Validity of the reopening of the assessment under Section 147. 4. Validity of the notice under Section 143(2). 5. Claim of depreciation if royalty payment was disallowed as capital expenditure. Detailed Analysis: 1. Disallowance of License and Technology Fees: The main dispute in all the years was regarding the disallowance of license and technology fees, treating the same as capital expenditure. The assessee, a joint venture between BMI and MIL, entered into agreements for the manufacture of specialized denim fabrics. The agreements included provisions for the payment of license and technology fees at 4% of net sales to BMI and MIL. The AO treated 50% of these fees as capital expenditure, while CIT(A) held the entire amount as capital in nature. Key Points: - The AO concluded that the technical information acquired by the assessee was of a perpetual nature, thus treating the royalty paid as capital expenditure. - CIT(A) observed that the technical information was used for setting up the plant and the entire payment was linked to the setting up of the business, thus treating the entire payment as capital expenditure. - The Tribunal, however, found that the license and technical cooperation agreements only granted the right to use the technical information and trade mark during the agreement period, not in perpetuity. The Tribunal held that the entire payment should be considered as revenue expenditure. 2. Computation of Book Profit Under Section 115JB: The issue was regarding the allowability of deduction on account of profit eligible for deduction under Section 80HHC while computing the book profit under Section 115JB. The AO and CIT(A) did not allow any deduction on account of 80HHC while computing the book profit, following the judgment of the Hon'ble Supreme Court in the case of Shirke Construction Equipment Ltd. Key Points: - The Tribunal upheld the decision of the AO and CIT(A), stating that the profit eligible for deduction under Section 80HHC has to be computed after setting off the brought forward business losses and unabsorbed depreciation. 3. Validity of the Reopening of the Assessment Under Section 147: The assessee raised disputes regarding the validity of the reopening of the assessment under Section 147 for the Assessment Years 2003-04 and 2004-05. Key Points: - The Tribunal did not consider it necessary to go into these legal issues as the claim of the assessee on merit was already allowed. 4. Validity of the Notice Under Section 143(2): A ground was raised regarding the notice under Section 143(2) being barred by limitation for the Assessment Year 2003-04. Key Points: - The Tribunal dismissed this ground as having become infructuous since the claim of the assessee on merit was allowed. 5. Claim of Depreciation if Royalty Payment was Disallowed as Capital Expenditure: The assessee raised a ground regarding the claim of depreciation in case the royalty payment was disallowed as capital expenditure. Key Points: - As the Tribunal allowed the claim of the assessee as revenue expenditure, this ground was dismissed as having become infructuous. Conclusion: The Tribunal allowed the entire payment of license and technology fees as revenue expenditure, set aside the order of the CIT(A) on this point, and upheld the disallowance of the deduction on account of profit eligible for deduction under Section 80HHC while computing the book profit under Section 115JB. The other grounds raised by the assessee were dismissed as infructuous.
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