2011 (9) TMI 798 - HC - Income Tax

Deduction u/s 35AB - expenditure on technical knowhow - AO disallowed the claim of the assessee mainly on the ground that the assessee itself was not involved in the manufacturing activities - In the present case, it is not in dispute that the technical knowhow acquired by the assessee has been used by the assessee in the manufacture of goods which the assessee got manufactured from a third party under its direct control and supervision with a particular specification as required by the assessee - deduction under Section 35AB of the Act would be allowable, where the assessee uses the technical knowhow to get the goods manufactured through a third party under its direct supervision and control Regarding expenditure incurred on acquisition of trade-mark under Section 35A - Tribunal has also considered the alternate argument of the assessee and held that even if the relief under Section 35A of the Act is not allowable to the assessee, then the relief would be allowable under Section 37 of the Act in the light of the judgment of the Apex court in the case of Alembic Chemical Works Co. Ltd. V/s. CIT reported in 177 ITR 377 - Since the decision of the ITAT on the alternative claim of the assessee has not been challenged in the appeal - appeal is disposed off

Summary

Issues:
1. Deduction under Section 35AB for technical knowhow expenditure
2. Allowability of expenditure on acquisition of trade-mark under Section 35A
3. Allowability of interest paid on borrowed funds as revenue expenditure under Section 36(1)(iii)

Analysis:
1. The first issue revolves around the deduction under Section 35AB of the Income Tax Act, 1961 for expenditure on technical knowhow. The assessing officer disallowed the claim as the assessee got its products manufactured from a third party under its control. However, the CIT(A) and ITAT held in favor of the assessee. The ITAT emphasized that the deduction under Section 35AB is allowable if the technical knowhow is used in manufacturing goods, even if done through a third party under direct supervision. The court upheld the ITAT's decision, stating that the deduction is not contingent on the assessee owning the manufacturing facilities directly.

2. The second issue pertains to the allowance of expenditure on acquiring a trade-mark under Section 35A of the Act. The assessing officer disallowed the claim, citing that Section 35A only covers patents and copyrights, not trademarks. However, the ITAT allowed the claim, highlighting the intrinsic link between trade-marks and patent rights in the pharmaceutical field. The ITAT also considered an alternate argument, allowing relief under Section 37 of the Act based on a precedent. The revenue did not challenge the ITAT's decision on the alternate claim, leading to the court not entertaining the second question. The court kept open the possibility of deciding the applicability of Section 35A on trademark expenditure in the future.

3. The third issue concerns the allowability of interest paid on borrowed funds as revenue expenditure under Section 36(1)(iii). The parties agreed that the question was settled against the revenue by a Supreme Court decision. Therefore, the court did not entertain this question. The appeal was disposed of with no order as to costs, concluding the judgment.