2016 (1) TMI 178 - AT - Income Tax

Disallowance on account of write off of technical know- how - intangible asset was very much in existence as on 01.04.2004 - CIT(A) allowed the claim - Held that - when an organization manufacturing a given product, incurs some expenditure on improvement of technology used in the manufacture of the said product, then, said expenditure shall constitute an expenditure incurred for better conduct of business and hence shall be revenue in nature. In the given case, the assessee was already engaged in the manufacture of SNR products. The assessee had merely incurred the expenditure to upgrade itself technologically, i.e. to produce the same product with a better technology Therefore, we are of the view that the said expenditure constitutes revenue expenditure - Decided in favour of assessee

Issues Involved:
1. Deletion of disallowance of Rs. 53,51,012/- made by the AO on account of write-off of technical know-how.
2. Classification of technical know-how fees as revenue expenditure versus capital expenditure.

Detailed Analysis:

Issue 1: Deletion of disallowance of Rs. 53,51,012/- made by the AO on account of write-off of technical know-how

The appellant, a company engaged in the manufacturing of specialized refractories and operating systems, entered into a technical assistance agreement with Krosaki Harima Corporation (KHC) to use their technical know-how. The total consideration for this know-how was Rs. 80,77,002/-, paid in FY 2002-03. Initially, the appellant claimed 1/6th of this expenditure under Section 35AB of the Income-tax Act, 1961, and subsequently claimed depreciation at 25% on the remaining amount. In FY 2004-05, the appellant wrote off the entire unamortized amount of Rs. 53,51,012/- and claimed it as a revenue expenditure.

The Assessing Officer (AO) disallowed this claim, arguing that since the technical know-how was capitalized and depreciation was claimed in previous years, it could not be reclassified as a revenue expenditure. The AO allowed only 50% of the depreciation at the prescribed rate of 25%, treating the expenditure as capital in nature.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's decision, holding that the entire expenditure on technical know-how, which had become obsolete, was deductible as revenue expenditure. The CIT(A) observed that the fees paid did not bring into existence any asset and were incurred for gaining technical knowledge, thus qualifying as revenue expenditure.

Issue 2: Classification of technical know-how fees as revenue expenditure versus capital expenditure

The primary contention was whether the technical know-how fees should be classified as revenue expenditure or capital expenditure. The appellant argued that the fees were paid for a license to use the know-how, which was owned by KHC, and thus did not bring into existence any capital asset. The AO, however, treated it as a capital expenditure, allowing depreciation accordingly.

Upon review, it was noted that the appellant initially believed the benefit from the know-how would last three to five years and thus amortized the expenditure. However, realizing the technology had become obsolete, the appellant wrote off the remaining amount in FY 2004-05.

The tribunal analyzed the terms of the agreement and relevant legal precedents, including the Supreme Court judgments in Assam Bengal Cement Co. Ltd. v. CIT and CIT v. Ciba of India Ltd. These rulings established that if the expenditure does not bring into existence an asset or advantage of enduring benefit, it should be treated as revenue expenditure. The tribunal found that the agreement with KHC did not confer exclusive rights to the appellant and that the know-how was also available to other licensees. The appellant merely had access to the know-how, which did not constitute an acquisition of a capital asset.

The tribunal also considered the Supreme Court's ruling in Alembic Chemical Works Co. Ltd. v. CIT, which held that expenditure for improving existing business technology should be treated as revenue expenditure. Applying these principles, the tribunal concluded that the technical know-how fees were indeed revenue in nature, as they were incurred for the better conduct and improvement of the existing business.

Conclusion:

The tribunal upheld the CIT(A)'s order, confirming that the write-off of Rs. 53,51,012/- for the technical know-how fees was correctly classified as revenue expenditure. The appeal by the revenue was dismissed, and the decision was pronounced in the open court on 13.11.2015.

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