2014 (8) TMI 459 - HC - Income Tax

Royalty payment - revenue expenditure or capital expenditure - Amount Paid to foreign company as per collaboration agreement - Invocation of section 35AB r.w Explanation 2 to section 9(vii) Held that - The courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trademark which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one or dependant upon certain contingencies, the right to use the technical know-how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign firm, payment whether made once for all or in different instalments co-relatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the court comes to the conclusion that it does so, then it has to be held to be a capital expenditure. Relying upon Alembic Chemical Works Company Limited Versus Commissioner of Income-Tax, Gujarat 1989 (3) TMI 5 - SUPREME Court - no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined - The payment made in terms of the two agreements dated 24.5.1989 and 8.12.1993 is purely revenue in nature, as they provide for payment of license fee for manufacture and sale of the products which are manufactured pursuant to the first agreement dated 7/24.10.1986 there was no justifiable reason to differ with the finding rendered by the Tribunal - the payment of royalty based on the two agreements dated 24.5.1989 and 8.12.1993 is revenue expenditure Decided against Revenue. Exclusion of excise duty and sales tax collection for computation of total turnover Deduction u/s 80HHC Held that - Following the decision in Commissioner of Income Tax v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court - section 80HHC of the Income-tax Act, 1961, is a beneficial section - It was intended to provide incentive to promote exports - The intention was to exempt profits relatable to exports - Just as commission received by the assessee is relatable to exports and yet it cannot form part of turnover for the purposes of section 80HHC, excise duty and sales tax also cannot form part of turnover - excise duty and sales tax did not involve any such turnover such taxes had to be excluded - Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the total turnover Decided against Revenue.

Issues Involved:
1. Nature of payment to foreign company under the collaboration agreement - royalty or fee for technical know-how.
2. Applicability of Section 35AB read with Explanation 2 to Section 9 of the Income Tax Act.
3. Classification of payments as revenue or capital expenditure.
4. Exclusion of excise duty and sales tax from total turnover for Section 80HHC deduction.
5. Exclusion of income from windmill from turnover for Section 80HHC deduction.

Detailed Analysis:

Issue 1: Nature of Payment - Royalty or Fee for Technical Know-How
The Tribunal held that the amount paid by the assessee to the foreign company under the collaboration agreement dated 8.12.1993 is in the nature of royalty and not a fee for technical know-how. The Tribunal interpreted the agreements dated 24.5.1989 and 8.12.1993 as agreements for granting a license to an existing company for manufacturing and selling automobile parts, rather than for setting up a new plant or manufacturing a completely new product. The Tribunal's view was that the payments under these agreements were for the right to use existing technical know-how, making them akin to royalty payments.

Issue 2: Applicability of Section 35AB
The Tribunal concluded that Section 35AB of the Income Tax Act, which pertains to capital expenditure on acquiring technical know-how, was not applicable. The agreements did not provide for any lumpsum payment for technical know-how but only for royalty payments. The Tribunal distinguished this case from the Supreme Court's decision in Jonas Woodhead and Sons (India) Ltd. v. Commissioner of Income Tax, where the payment was for setting up a new factory, thus falling under Section 35AB.

Issue 3: Classification of Payments - Revenue or Capital Expenditure
The Tribunal found that the payments made under the agreements dated 24.5.1989 and 8.12.1993 should be classified as revenue expenditure. The Tribunal noted that the Department had accepted similar payments as revenue expenditure for the assessment years 1986-1987 to 1994-1995. The Tribunal also observed that the payments were for renewing the license to use technical know-how for manufacturing and selling products, which aligns with revenue expenditure.

Issue 4: Exclusion of Excise Duty and Sales Tax from Total Turnover
The Supreme Court's decision in Commissioner of Income Tax v. Lakshmi Machine Works was cited, which held that excise duty and sales tax do not form part of the turnover for the purposes of Section 80HHC. The intention behind Section 80HHC is to provide incentives to promote exports, and since excise duty and sales tax do not emanate from the turnover, they must be excluded. Therefore, this question was answered in favor of the assessee.

Issue 5: Exclusion of Income from Windmill from Turnover
The Tribunal's decision to exclude income from the windmill from the turnover for the computation of deduction under Section 80HHC was upheld. This was based on the precedent set in Commissioner of Income Tax v. Madras Motors Limited, where it was decided that such income should not be included in the turnover for Section 80HHC purposes.

Conclusion:
The appeals were dismissed, and all substantial questions of law were answered in favor of the assessee. The payments under the collaboration agreements were considered royalty and revenue expenditure, and excise duty, sales tax, and windmill income were excluded from the turnover for Section 80HHC deductions. The judgment emphasized consistency in the Department's interpretation of agreements unless there is a change in law or new material evidence.

← Previous Next →